This is just for illustrative purposes only! Moving on, here are the results of our backtest:. The data showed that over the past 5-years, the indicator that performed the best on its own was the Ichimoku Kinko Hyo indicator. Surprisingly, the rest of the technical indicators were a lot less profitable, with the Stochastic indicator showing a return of negative However, this does not mean that the Ichimoku Kinko Hyo indicator is the best or that technical indicators as a whole are useless. Think of all those martial arts movies you watched growing up.
The Rock used a combination of moves to get the job done. Forex trading is similar. It is an art and as traders, we need to learn how to use and combine the tools at hand in order to come up with a system that works for us. Biggest Advantage: Can be used with leading indicators to catch nice moves in the market. Biggest disadvantage: It is a lagging indicator and thus, it should not be traded alone.
The Ichimoku cloud also known as the Ichimoku Kinko Hyo indicator can be used to determine support and resistance, trend direction and momentum for an asset. Complicated yes? No need to scratch your head doing all these. Your charting platform will do it for you. Signals and Strategies generated.
Based on the results above, you can clearly see that this indicator gives more losing trades than winning trades. Biggest advantage: Ichimoku cloud is an all-in-one technical indicator meaning that it can be used alone to make trading decisions. Biggest disadvantage: Ichimoku Cloud gives its signal long after the real move has happened. MACD is a powerful indicator that is often used by traders to check for price momentum, price trend and direction.
This awesome indicator has three components, two moving averages signal line and MACD line and a histogram. This calculation uses the closing prices for the two EMAs. Then a 9-day EMA is added to give the signal line. MACD is a lagging indicator meaning that it gives its signals long after the real move has already happened. The various components of this versatile indicator can be used to gauge price momentum, price trend and direction. There are many different MACD trading strategies.
Let us look at an example of such strategies. Divergence happens when price action is doing the exact opposite of what the MACD is doing. For example, if price is forming lower lows and MACD is forming higher lows, this indicates the formation of a strong bullish signal and the opposite can be considered for a bearish signal. MACD appears to be more reliable than the indicators that we have back tested before. Biggest advantage: It can be used either as a standalone indicator or be used with other leading and lagging indicators.
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Biggest disadvantage: MACD shares the disadvantage of being a lagging indicator with all the other lagging indicators. This means that it usually generates signals long after the real move has happened. This versatile indicator can be used to help you, the trader to identify a new trend or beware of extreme condition. Initially, the CCI indicator was developed for use in trading commodities but today it can be used for trading equities, indices, currencies and other assets. CCI is an oscillator which moves to the upside of the baseline marked 0 or the downside.
Traders use it to spot buying and selling opportunities.
Why I Hate Indicators
Here are some examples of trading strategies that are based on the CCI. Try them out. Take note: CCI is a lagging indicator and as thus it will most definitely give signals after the move has already happened. For best results, use CCI in a trending market environment. So, we can say it is somewhat reliable. Biggest Advantage: CCI is very easy to use with very simple rules that anyone can follow. Biggest Disadvantage: It can produce multiple false signals when the market is choppy leading to losses.
Moving averages are some of the most popular technical indicators used by traders to analyse the markets and take a trading decision.
Is Forex Trading Without Indicators Possible?
The SMAs are also used as dynamic support and resistance. An example of an SMA trading strategy has been captured here. The rules are pretty simple.
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The trader uses two SMAs. Looks good yes? Try and identify potential trades. Remember: SMAs are lagging indicators and should be used together with a leading indicator for better results. Biggest Disadvantage: It lags and if used inappropriately can lead to fake trades and late entries. Pivot points are the first example of leading indicators. They represent support and resistance levels where the direction of price movement can potentially change. Being a leading indicator, you can use it to anticipate a bounce when the price hits it. See the chart posted above.
Pivot Bounce. Biggest advantage: Pivot points are leading indicators meaning that traders can catch the main move as it happens. Support is defined as an AREA on your chart where there is substantial buying pressure while resistance is an AREA on your chart with a potential selling pressure. In some places, you will hear people referring to support as floor and resistance as roof. For you to understand how support and resistance works, you first need to understand that markets are either in a trend or a range at any given time.
With that in mind, you can go on and plot your support and resistance levels. Support and resistance are leading indicators because you can see them long before price hits them allowing you to plan your trades in advance. Check out how I trade support and resistance here. Biggest Advantage: Support and Resistance are easy to spot and can be very profitable if combined with multi time frame analysis and price action.
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Biggest disadvantage: Support and resistance does not hold forever and can lead to losing trades if not traded cautiously. It is subjective in nature and hard to pin down in real time trading. Use maths and statistics to recognise and dump things that look OK on the surface but are in fact dragging you and your money down the drain. The starting point for me is always the Fundamental analysis measured by Commitments of Traders and Risk Events Calendar. Before even thinking about entering a trend trade, I want to know where is the price is likely to go in the long term and what big institutional traders are doing in the market.
Momentum indicator. This indicator draws me higher time frame stochastic on lower time frame, daily stochastic on 4 hrs time frame. I CONSIDER only long entries when the daily stochastic is oversold on lower time frames and short entries if the daily stochastic is overbought on lower time frame. I exit my long positions around high pivot points and exit my short positions on low Pivot Points. This allows me to see if the currency is strong or weak against the basket of other currencies rather than comparing in to another single currency. Supply and Demand indicator. Any successful trader has to have a thorough knowledge of support and resistance.
Retrecement indicator. Many indicators provide a specific trade signal which alerts the trader that now is the time to take a trade.
It can be easier than learning to read price charts. Instead of learning how to identify a trend on the price chart, new traders try to find an indicator that will determine the trend and trend reversals for them. The indicator shows a visual representation of the mathematical formula and price inputs. To a skilled chart reader or trader, an indicator often won't reveal more than what is visible just by analyzing the price chart or volume without any indicators.
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There are thousands of indicators, and new ones are being created all the time. By combining indicators and using indicators in different ways, there are also countless trading methods involving indicators. There are a few common types of indicator strategies:. This is when either price or an indicator crosses paths with another indicator. Price crossing a moving average is one of the most straightforward indicator strategies. An alternative version of the price-crossover strategy is when a shorter-term moving average crosses a longer-term moving average. This is called a moving average crossover.