Technical Indicators In Forex Trading

Forex traders often look at technical indicators such as
Bollinger Bands, Pivot Points, MACD, Moving Averages and the
such to help them determine where to enter or exit trades.
Using technical indicators is fine, however many traders
overemphasize their importance or just plain misunderstand
them.

Many forex traders think that they can simply download an
indicator and then mechanically apply it into their trading and
do so profitably. This is just a plain illusion. Successful
traders realize that there is a lot more to using indicators
than just asking them to generate buy/sell signals or pin-point
exact entry points. Technical indicators for them represent just
one part of their trading strategy.

Let's take a look at some of the reasons why you should not put
all your faith into those sometimes confusing little indicators.

Take Moving Averages (MA's) for example. They are "supposed" to
show the direction of the trend. The most common and often used
are the simple 200day MA, 100day MA, 50day MA, 35day MA and
the 21day MA but they are only valid on daily graphs. Some
forex day traders say that a good signal is when the 50day MA
is crossed by the 13day MA and that when this occurs you should
trade in the direction of the cross.

The problem with this (apart from the fact that it only works
on daily graphs) is that these types of "crosses" do not occur
often enough for traders to exploit them. This can often lead
to a situation where traders are seeing what they thought was a
cross now reverse and uncross. Even worse, it can lead to a
situation where day traders are "chasing" and trying to
anticipate a cross. If you are doing this, you are distancing
yourself from the market which you are trying to trade. Not
only are you trying to guess what the price is going to do next
but you are guessing what the indicator, based on the prices, is
going to do next.

Other problems with technical indicators involve issues with
the quotes and prices given to you by your broker. Forex
brokers are market makers and as such different brokers will
give you different quotes and prices at a specific point in
time. Naturally, a different price could lead to a situation
where different traders, trading the same market have the same
indicators giving them different responses. That's how
arbitrary technical indicators can be.

Finally, a lot of these technical indicators were developed by
people trading the stock market. With the growth of computers
and software packages that incorporate these indicators,
technical analysis has become very popular and spread to other
markets such as the forex market. What currency traders should
be aware of however, is that as these indicators were developed
in a time where real time information did not exist. As such,
the limitations of technical analysis becomes even more
exaggerated in forex trading – not only is technical analysis
an interpretation of historical events but it becomes even more
so in the forex market, a market moved by real time events.

Conclusion

Successful forex traders understand the limitations of
technical indicators and realize that technical analysis should
incorporate just one part of their trading strategy. In a recent
international Forex market event visited by the major banks and
institutions - the main players that influence the foreign
currency market – a survey was done to better understand what
analysis they use. The results might be surprising to some
tarders. The survey showed that a mere 26% use technical
analysis and indicators compared to 41% who said they use
fundamental analysis.

About The Author: Jovan Vucetic - Margin Strategies
http://www.margin-strategies.info/

John V
John C. Vincent/CEO/The Opt-In Magic System
http://thestudentloanblog.blogspot.com/