Many traders develop a preference and liking for certain indicators to the exclusion of some popular ones. While any trader who develops a profitable trading strategy and sticks to it is worthy of admiration, they might be trading blindfolded if they are not using certain indicators. The principles we will discuss here apply not only to the forex markets, but to the equities and commodities markets as well.
Your appreciation for the accuracy and usefulness of the indicators we will look at will only increase when you see the high frequency with which they predict support, resistance, profit taking and stop loss levels.
Trend lines - Trend Lines help a trader see the market direction more clearly. Generally speaking, a trader will be much more successful if he does not trade against the market trend. Trends arenâ€™t always clear, especially when the market is flat, but when they are it makes deciding on the trade direction is a snap.
Fibonnacci Retracement and projection lines â€“ Fibonnacci analysis not only forecasts how far prices can pullback but can also predict how far price will go. If properly drawn, the profit and retracement forecast are often accurate to the pip.
Pivots Lines â€“ Pivot points are calculated from the previous days highs, lows, open and close prices. Fortunately, most forex platforms include a trading tool that allows the trader to easily apply this indicator. Pivot Points highlight daily support and resistance levels and in a large percentage of the time they accurately predict how far (up or down) prices will go.
However, experience will show that they are less reliable in the following circumstances:
1. On Mondays - weekend data tend to falsify some technical indicators; pivot points is one such indicator.
2. When a major event causes a relatively large price move on the current daily candle, as compared to the previous dayâ€™s high and low prices, especially when the previous days price action was relatively flat.
RSI â€“ The Relative Strength Indicator is an oscillator that indicates when the market has gone too far too quickly (oversold and overbought levels). Like many other indicators the frequency and accuracy of signals depend on how the trader sets the indicatorâ€™s parameter and the trade volumes in the market. The RSI indicator can be a very powerful indicator for finding trading opportunities, where a clear trend is observed. For example, a RSI oversold signal is usually a good buy opportunity if the market is in a clear up-trend. Other popular oscillators are the MACD, Stochastic and Awesome indicators.
Chart Patterns â€“ Chart patterns such as morning stars, triangles, and wedges are quite popular. However, a good trader needs to remember that a market has an unpredictable and random nature. The trader just needs to discipline himself to use other technical indicators to confirm what the charts are saying and to filter bad signals.
It is not recommended that a trader use any indicator by itself, instead, indicators should be used to complement each other. Neither is it recommended that more than 3 indicators be used at once, 4 at most. Reason being that technical indicators tend to contradict each other and thus tend to filter out good opportunities.