Hundreds of Currency Trading Indicators, Which One to Use?

Friday, March 4, 2011




You probably have looked at your trading platform in the past or even recently and wondered which currency trading indicator or indicators are the best one(s) to use. It's not easy to decide because most traders do not understand how and why they were developed. And many of the indicators that were designed for a particular purpose, do a poor job of meeting that purpose.





How does a trader decide which indicator or indicators to use? First, using too many indicators is a recipe for disaster. One of the 26 Reasons Why People Fail In Forex, is the use of too many indicators. There is a plausible reason for this. The short answer is that the indicator that gives you the best percentage signal for a trade is the best indicator for you to use. So, if you have 3 indicators all telling you to trade and one has a 45% win percentage and the other two have less, then the 45% winning percentage is the one you should use. Adding up all 3 of your indicators does not give you an increased chance of winning. I explain this more completely in the book.





Second, which indicator is the best one to use? There are going to be many arguments regarding this. Many professional traders use some kind of momentum indicator or oscillator in their trading decisions. The best one in my opinion and in the opinion of many is RSI, the Relative Strength Index. However, as in most cases when it comes to indicators is that people are using the wrong information when it comes to reading what they say or mean.





For example, RSIs best use is not overbought and oversold readings. In fact, it can be easily proved that in most cases these reading are false. Nor is it the location of divergences simply because many traders today believe that divergences are signals for price to reverse when in fact they are signals that price is about to do the opposite.





The best use of RSI and momentum is a signal that is produced called a Reversal. I have written about Reversals here on this site and extensively in RSI Fundamentals: Beginning to Advanced (You can order this now and get a FREE copy of RSI Trading Examples Vol. 1 until January 2nd, 2011.)





If you learn about Reversals and where they occur you will be on your way to trading Forex in a successful way and the currency trading indicators question will no longer be an issue for you.


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