How Many Indicators Do You Need to Be Successful in Forex?

Friday, January 28, 2011




How many indicators do you have on your chart when you trade? Which indicator do you understand best? Which indicator gives you the most reliable signal? What is more important price or the indicator?





These are questions that many traders face when they begin trading in particular if they spend any time on Forex forums where traders are often predisposed to crafting new indicators. Typically this ends up with a number of indicators or one indicator that includes several indicators and is a recipe for failure.





What is more important, the price or the indicator?





Price action traders will say that price is more important, that all information is in the price and that using an indicator means looking back to determine the future. Regardless of what you think neither price action in the present, nor an indicator that uses past data can tell you anything about the future. In fact, most of the studies from the 1900s and on, determined that price chart patterns that are relied upon by price action traders, can be produced by flipping coins or pulling random numbers from a hat.





How many indicators should you have?





Whether you think you are a truly price action trader or not you can benefit from an indicator. In fact, many price action traders utilize Fibonacci ratios when in effect are indicators. The answer to how many indicators to use is simple, it is one. Why?





Which indicator gives you the most reliable signal?





If you have traded for any length of time you should know which indicator you are using gives you the most reliable trades. Maybe you have never considered this but if you could only have one indicator on your chart, which one would you choose? One indicator is giving you a better read than the others. For example, if you use RSI and it is giving you 65% reliable trades over a second indicator then that is the indicator you should use.





A second indicator that is 30% reliable does not give you a 95% chance of success. You success is based on the indicator that is giving you the highest percentage. Statistical studies can be done to determine which indicator is best.





For example, I have done statistical studies on RSI and learned where it is best to trade RSI and when. This would include things like when to trade divergences and which kind. When to trade reversals and which kind? What is the best time to trade these signals? What kind of drawdown can I expect and what kind of profits can I expect? Once you have this information in your trading system, the trade is now based on the odds of what the future holds.





Learning which indicator is best for you and learning as much as you can about that indicator, will put you in a much better place to trade and put the odds in your favor.


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