How Useful Are Charting Indicators? - Currency Trading Article

By:Erik Teh

Many Forex Traders have computerized charting software to help make trading decisions. There are many excellent indicators that can assist a trader- such as MACD, Relative Strength Index and Moving Average Lines, just to name a few.

Using indicators alone can reduce the probability of trading success. Why? Because the Forex market is driven by human emotion and charting software is a computerized program. Indicators only record historical buy/sell patterns; they don’t accurately predict future movements of the market.

For example, an indicator may be in the overbought zone. This may give the forex trader a heads-up that we should be reversing our bets to begin shorting the currency. But I have seen the market stay in the overbought zone for up to 12 hours (in a 60+ minute chart) – the market simply does not want to sell. Indicators fail to pin point the precise time the market will sell. This is the weakness of using indicators alone – their future prediction value lags behind the market. Fundamental announcements and market volatility can invalidate indicator patterns.

Charting software is like going into a pilot’s cockpit. The pilot has hundreds of gauges and indicators to assist him during the flight. When the pilot encounters a sticky situation, he will typically turn to his human judgment to make decisions. The plane’s indicators are used only for confirmation and guidance. In the same way, a forex trader must first rely on his own human judgment and then consider computer indicators.

So how do you predict future price movements? One method is to DRAW TREND LINES – this is the human element involved in analyzing charts.

Trend lines increase the probability of trading success. The line dissects the market into two zones – a buy zone and a sell zone. These zones will help indicate the prevailing trend of the market. Simply trading in that zone will exponentially increase the chances of profitable trades. When the market changes direction, the trend line will typically be broken. The candlestick will move to the other side of the line to begin a reversal. Broken trend lines immediately tell a trader that future price movements are “likely” to shift direction.

Human judgment must play the pivot role in any trading decision, with indicators used only as a tool for confirmation. Adding indicators to the decision process will complete the analysis. When human judgment and indicators align together, the probability of success will increase.

Erik Teh

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