Indicators can be a great tool for the traders if used properly. Every single indicator has its own unique function. Professional traders use indicators in order to find out the best possible trade in the market. It’s a tough choice to choose the right indicator for the right currency pair but this this is essential if you want to achieve long-term profitability.
There is always the possibility that relying too much on indicators can cause you losses in the forex industry. But when these tools are used in connection with fundamental analysis, there is the potential for large economic gains when using automated trading strategies that are proven in the forex markets.
Trading Example: Improper Use of Indicators
Many traders believe that use of an indicator is totally unnecessary. No one can truly answer to this question since it varies from person to person. But research and statistical data shows using 1 or 2 indicators with valid trading strategy can significantly improve trading performance.
Figure: CCI, Stochastic, RSI, Ichimoku and Harmonic indicators
In the above figure, the forex trader can barely see the raw price movement and candlestick formation as different from the broader trend. Using too many indicators will only cause you problems and create doubt in your trading signals. Professional traders use a maximum of 2 or 3 indicators for filtering the best trade opportunities.
The four indicators used in the chart above are powerful and reliable indicators used by many traders: CCI, Stochastics, RSI along with a plotting of Ichimoku and Harmonic indicators. But the function of four different indicators will never conclude to single entry result — and this can create problems in trading. In practice, it is likely to create much doubt regarding the next possible move of the pair. In a word, a forex trader can get lost when dealing with too many indicators at once.
Seven common Mistakes made by forex traders using indicators and oscillators
- Using too many indicators in the same chart for the confirmation of trade entry
- Believing the indicator blindly regardless of the price action scenario
- Using the wrong indicator in the wrong currency pair
- Using indicators in lower timeframes and making decisions based on a single time frame chart analysis
- Trading with the indicator without the proper knowledge of its functionality
- Modifying the indicators default values with new sets of data without any backtesting
- Ignoring the longer timeframe scenarios in the market and reacting to the shorter timeframe indicator signals.