Forex Trading - An Introduction To Technical Indicators And How They Work
James Woolley
April 15, 2010
I received an interesting question from one of my blog readers recently which gave me something to think about. It was basically all about technical indicators, ie what they are, how they work, etc. I often assume that most people know all about this subject, but it's easy to forget that a lot of people new to forex trading will know absolutely nothing about technical indicators.
To summarise, technical indicators are basically mathematical formulae based on the past performance of a particular currency pair, and more often than not are based on price and/or volume. They are used to help determine where the price is likely to move in the future so you can then make trading decisions based on this analysis.
I should point out that there is no such thing as the perfect technical indicator. Although there are now hundreds of different indicators to choose from, you will not come across one that is able to predict the future market direction of a pair with anywhere near 100% accuracy. They are basically there to guide you and to help you find high probability set-ups.
It's also true that just adding more and more indicators to your charts will not necessarily increase your overall success rate. This is because the more indicators you use, the more likely it is that you will get a lot of conflicting signals, which results in greater confusion and fewer opportunities to trade.
You generally want to use just a small handful of indicators that compliment each other well. In other words they each provide you with good buy/sell signals at roughly the same time. They will not always be right of course, even when they all indicating a future price move in the same direction, but they will provide with plenty of high probability trades where the odds are definitely in your favour.
Then it is down to you to manage your money so that these winning trades are capitalised on as much as possible. My advice is to try and let them run for as long as possible, although my preferred strategy is to close half the position for a pre-determined target, move my stop loss up to break-even, and then let the other half of the position run for as long as possible.
As long as you keep your losses small by using a tight stop loss, you should find that the right combination of technical indicators can generate some excellent profits. This is particularly true when they all combine to give definitive buy or sell signals on a regular basis. So the point is that it's definitely worth using technical indicators if you have aspirations to become a profitable forex trader.
Click here for more information about a forex course that will teach you all the basics of currency trading, and to read a full review of Forex Nitty Gritty.
To summarise, technical indicators are basically mathematical formulae based on the past performance of a particular currency pair, and more often than not are based on price and/or volume. They are used to help determine where the price is likely to move in the future so you can then make trading decisions based on this analysis.
I should point out that there is no such thing as the perfect technical indicator. Although there are now hundreds of different indicators to choose from, you will not come across one that is able to predict the future market direction of a pair with anywhere near 100% accuracy. They are basically there to guide you and to help you find high probability set-ups.
It's also true that just adding more and more indicators to your charts will not necessarily increase your overall success rate. This is because the more indicators you use, the more likely it is that you will get a lot of conflicting signals, which results in greater confusion and fewer opportunities to trade.
You generally want to use just a small handful of indicators that compliment each other well. In other words they each provide you with good buy/sell signals at roughly the same time. They will not always be right of course, even when they all indicating a future price move in the same direction, but they will provide with plenty of high probability trades where the odds are definitely in your favour.
Then it is down to you to manage your money so that these winning trades are capitalised on as much as possible. My advice is to try and let them run for as long as possible, although my preferred strategy is to close half the position for a pre-determined target, move my stop loss up to break-even, and then let the other half of the position run for as long as possible.
As long as you keep your losses small by using a tight stop loss, you should find that the right combination of technical indicators can generate some excellent profits. This is particularly true when they all combine to give definitive buy or sell signals on a regular basis. So the point is that it's definitely worth using technical indicators if you have aspirations to become a profitable forex trader.
Click here for more information about a forex course that will teach you all the basics of currency trading, and to read a full review of Forex Nitty Gritty.
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