Why You Shouldn’t Trade Using Indicators Alone

Filed under: Learn Forex Trading |

 

Technical indicators are very popular trading tools for people new to forex trading. This is perhaps because they seem, on the face of it, very logical and relatively easy to use – and it just seems like a good shortcut to riches while also making the user feel like they are smart for using them. However, I believe that very few people turn a profit by using indicators alone (although there are some good long term systems involving moving-average crossovers and such). This is because indicators use past data, and have no real bearing on where price is going next. As such, indicators are always lagging behind price, and it can be incredibly frustrating if you are trying to trade with them.

 

Indicators include tools such as the MACD, RSI, moving averages, Bollinger bands, Fibonacci retracement tools, and the stochastic tool. While these indicators can glean some important information, I do not think they should be used exclusively to make a trading decision, but rather, they should be used just as an added confirmation that price may be about to move in a certain direction. Ultimately, you should be looking at price to determine your trades, and therefore, price action signals are the most powerful form of data at your disposal.

 

For example, suppose that price has formed a bearish reversal signal at a key level of support/resistance and you are thinking of taking the trade. A quick look at some technical indicators could give you that added confidence and confirmation to take the trade. For example, the RSI could have formed a divergence with price, and price might be at an extreme edge of the Bollinger bands. This would give you some extra confluent signals that your trading decision is on the right track.

 

In summary, I would not recommend using technical indicators alone to make your trading decisions, but they could come in useful just for that little bit of added confirmation.

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