Stop Using Indicators
Published by Jay Davies in Trading Articles
Technical indicators, such as the exponential moving average, relative strength index (RSI) and the moving average convergence divergence (MACD), have long been promoted as a reliable means of making money in the Forex market. In fact, there are some very clever marketing tactics used to sell indicator based systems.
Technical indicators are generally placed into two categories: lagging and leading. Lagging indicators are regarded by many as being useful during trending periods, whereas leading ones are thought to be stronger in ranging and consolidating markets.
A lagging indicator applies a mathematical formula to previous price action in order to show how the market behaved over a certain period of time in the past. The aim of these indicators is to spot or establish the direction of a trend. However the problem lies in the fact that they tend to show these indications well after a trend is already in place, thereby effectively making them useless.
A leading indicator is typically used to provide an indication of how "overbought" or "oversold" a market is, and show where price is likely to reverse and change direction. Unfortunately, just like lagging indicators, leading ones are far from reliable and they tend to show more false entries than not.
Consider the following chart example. The leading RSI indicator which is supposed to be great for ranging and consolidating market conditions, displayed its first "overbought" signal during a time when price was ranging. Despite the signal to sell, the market moved higher. The RSI continued to fire off "overbought" signals, yet the market moved higher again and again.
Now consider this exact same chart with no indicators, just purely the price action with a few levels drawn in to highlight what actually occurred in the market. Notice how price could not move lower through the support level at the bottom of the chart, with it rejecting that level on a number of occasions. Price then went on to move higher, breaking through two minor resistance levels and showing signs of weakness when attempting to push back lower.
The plain and simple truth, is that indicators do not move price, but rather price moves the indicator. This makes all of the information obtained from a technical indicator really of no use, it's old information. The price on a chart will tell a trader everything they need to know. By simply looking at the price action of any currency pair, they will be able to discern what market players are doing and make an educated assessment of where price is likely to head. Cluttering a chart with secondary data from the past is not going to improve trading results.