Fancy Indicators and Why They Don

With countless number of indicators available today, many traders are on the constant lookout for that one Holy Grail Indicator, which can predict the market movement 100% of the time. Sadly, there is no such indicator and there will never be one. The sooner we can accept this universal fact, the better our chances of winning in this competitive game of forex trading.

In our search for the Holy Grail, we tend to forget the essential constituent of these markets –buyers and sellers. It is the interaction amongst these buyers and seller which determines the market prices. ‘Interaction’ is nothing but the price at which both these buyers and sellers are willing to transact. This ‘Interaction’ Price is a factor of the perception that these individuals have for a particular forex pair. Let me explain this with an example. Jack thinks Euro will rise going forward and Betty thinks it will fall. They both enter their orders for buying and selling respectively. Ideally both followed their perception and believed that the price will move in their favor in the near or distant future.

Now picture this – the forex markets are one of the most liquid markets in the world with an average daily traded volume of $4 trillion comprising of millions of transactions each day. These transactions represent the perception and the belief that these thousands of individuals have about the price of a particular forex pair.

My question to you – How can any indicator in the world measure the perception and belief of these thousands of individuals with 100% accuracy? Now, that’s what I call an ‘Aahaa’ moment. Think through this question you will realize that this is the way human psychology works. We all tend to focus on talking the easier path (HOLY GRAIL) to reach our objective and ignore the tougher one (PRACTICING TRADING. Not realizing the tougher the path is, the most rewarding and informative.

However, this does not mean that one should disregard indicators such as Moving Averages, RSI, Stocs and other popular indicators. All these indicators also have an average success probability of 50% but the fact that many people use them makes them stand out from the crowd. These indicators need to be used together to build up the probability of our entry positions. Again, it is very simple to understand why these indicators work and why one should stick with the most popular ones. These indicators especially the Moving Average is one of the oldest and the most popular indicator around. Millions of people across different markets including the forex market look at Moving Average as a tool which can help them take their trading decisions. It is this confluence of perceptions at a particular point which makes the Moving Average stand out as one of the most successful indicator. When many people buy or sell together the markets will automatically move in the intended direction and this is propelled by looking at averages. Now the funny part is – people look at 50 EMA or 200 EMA as one of the most important MA to have on your chart. My question to you – why is 49 EMA or 51 EMA is less powerful than 50 EMA. It is simply because more people look at 50 EMA rather than 49 or 51 EMA. And while trading we tend to focus our efforts on identifying the crowd perception.

In the end, if you are one of those who is on the constant lookout for Indicators I would recommend you to stop doing that because it is an endless goose chance which will lead you nowhere. Start sticking with the popular ones and drop the fancy one’s out there, your trading will be much more profitable and simpler.

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by jimmielksroberts | 2016-02-22 12:13