The Best Forex Trading Indicator May Be Your Mind

What is the best indicator for trading Forex? Ask that question on a Forex forum and you will get no consensus. Everyone has their favorite indicator and there are many to choose from.

Should we use one indicator when we trade? Should we use more than one indicator? If we use more than one indicator does that give us a better chance to be right?

Many traders at some point in their trading experience try an indicator. Many use more than one and some develop their own. Does having more than one indicator help?

John Jagerson who wrote, "Profiting from Forex" and whose website educates traders to trade a multiplicity of financial markets says that if you have more than one indicator, the indicator that gives you the best results is the only one you should use.

In other words if you are using the RSI, the Relative Strength Index, and your signal from that indicator gives you a 55% trading edge and you are also using another indicator such as the MACD, that gives you success at 30%, the RSI is the better indicator for you to use. And, just because they both agree does not mean that you have an 85% chance of success.

Unfortunately trading doesn't work that way. If it did you could easily build a trading system that creates 100% success rates based on multiple indicators agreeing with each other. Constance Brown in her book, All About Technical Analysis, confirms this point when she says, "My probability of being right had not increased just because five oscillators all said the same thing." In fact, multiple indicators can agree and all be wrong.

The best Forex trading indicator is the indicator that works best for your trading style. There are several things to consider when you develop your own trading style. Here are just a few:

1. When can you trade the Forex market? The best time to trade is when the market has the most liquidity. This is from the time the London market opens until the New York market closes. The most liquidity is when both markets are open. The advantage: Less manipulation of markets and the best spreads.

2. The time frame that you wish to trade. Many traders like to see quick results. This leads to trading shorter time frames typically under one hour. This puts traders in the "price noise" time frames and makes trading harder because prices seem more random. My suggestion: Trade a time frame of one hour or longer where "noise" has less of an effect.

3. Develop a system which you can formulate into algorithmic form. This will allow you to test your system and it will give you statistical data that improves your entry and exit locations. The advantage: It makes your system more empirical. You will have more confidence in your entries because they are based on real data.

4. Understand the basics of price theory. You should learn the theories behind how prices move in currency markets or for that matter in any financial market. Prices are mostly efficient meaning that all the information about price is in price and therefore the price is not going to move without new information. That does not mean you cannot find places where there is an edge in the market. This is the core idea of successful trading. The advantage: You will better understand why markets move the way they do and make better decisions.

5. Use your own mind. The best Forex indicator is your mind. Technical analysis can alert you to situations where a trade possibility may exist. It requires keen insight and experience to know when to enter and what position size to enter in order to have the best chance to become profitable. This requires a thinking and engaged mind. The advantage: You are in control of the final trading decision.

Going through these steps will help you determine which indicator is best for you. It may take some experimentation but once you decide, learn all you can about that indicator and what it is telling you. Follow these steps and you will see yourself making consistent progress toward becoming a successful Forex trader.