Forex Trading: The Right Way to Use Technical Indicators

By: Tom Long
Being one of the Power Course instructors allows me to see the charts that new traders use for their trading decisions as they will send them to us for our opinions. I must say that many of them are so cluttered with indicators, lines and how knows what else that I have a hard time seeing the currency pair or time frame of the chart. I cannot even see the current price of the market on some of them.

When I see this I usually recommend to the trader to become more price aware in their trading. After all, how many technical indicators do you need to see that the market is overbought or oversold? Besides, I have a secret for you. Almost all technical indicators are just fancy moving averages. So if you use four or five indicators, you are basically using the same information over and over again.



You should not confirm signals generated from indicators with other indicators. Since they are based on moving averages, the only real difference will be the timing of the signal. Typically Stochastics will become more extreme than RSI and both will signal an entry before MACD…..just about every time.

So if you have five indicators showing a sell, this does not mean that the trade is better than one where only four indicators show a sell. What you should be using to confirm these signals is other forms of analysis. I think that the best is simple support and resistance with previous highs and lows or trendlines being the best examples.

My favorite setups are when the market is in an uptrend and pulls back to support at the same time the indicator is giving a buy signal. The opposite is also true in that I like to sell in a downtrend when the market has rallied up to a resistance point as the indicator is showing a sell signal. Many successful traders do not even use indicators as trend analysis and use of support and resistance is enough for them. They do not need an indicator to tell them when the market is oversold or overbought. They use the movement of the market itself and consider that the best indicator of them all.

If you prefer to use indicators, pick the one or two that you are most comfortable with and use those. But you should also incorporate more of the market movement in your analysis for a better point of view.

Investment
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