A pharmacy has hundreds of different drugs to sell, but when a patient enters a pharmacy he will only go for the medicine prescribed to him. Trading Forex through technical indicators is very similar to this scenario: traders have “a lot” of technical indicators to trade with but only a few can be useful to them.
In this article I will categories some technical indicators and try to cover some trading combinations which can be useful for traders who use a mix of indicators for trading. Following are the main categories of technical indicators.
1. Momentum Indicators
2. Reversal Indicators
The second are reversal indicators. They tells us of a reversal expectation after price has gone in a particular momentum. They are commonly based on the logic of over-bought and over-sold positions in momentum indicators and are therefore referred to as leading indicators. Commodity Channel, Relative Strength, Bollinger Bands are a few examples of such indicators.
3. Support/Resistance Levels
The third set of indicators are support/resistance levels. These levels not only helps in trade entries but are of key importance for setting trade targets and stop losses. In addition, SR Levels work both over market momentum and market reversals. A breakout of a level refers a momentum continuation whereas a pullback from a level represents a reversal. In fact many momentum and reversal indicators work as support resistance level. Most common examples of trend indicators working as support/resistance levels are moving averages (200 SMA/EMA) and trend-lines. Some other examples of SR levels include Fibonacci, pivot points, Murray math etc.
Usually traders are always looking for one best indicator for trading. My recommendation to them is to shortlist their available (and favorite) indicators to a minimum level with at least one momentum, reversal and SR indicator. Although as a result the charts could look like a mess. But the trick here is to find order in chaos so that each expectancy through indicators is considered and well dealt.
Following are some tips that can be used to find order in your trading systems:
- Know your indicators: You should be properly aware of what your indicator is reflecting at each instant of time. When it is giving a signal, when it is in continuation of signal and when it is idle.
- Look at each indicator as what it is saying. Always go for a trade when you have a majority decision supported by at least one momentum, reversal and SR indicator. It is better to enter late and earn small pips than to enter early and stuck in a negative momentum.
- Always respect the SR levels. Never place a buy (sell) before a nearest resistance (support) level unless you are scalping and setting it as a target.
- Always trade when you have a good risk reward (Stop loss to Target profit) ratio.
- Always set your targets (stop losses) with some offsetting pips before (after) your levels.
As I mentioned in my last article, if you are trading in the mid-market levels (when supported by both your momentum and reversal indicators), you always have the opportunity to average out your positions and go for a bucket loss than a stop-loss. However, this is only recommended once you have perfected your set of indicators to a trading system.
Finally a piece of advice to traders. Pharmacy has many variety of medicines but patients go only for the medicines prescribed by the doctors. No patient can opt a best medicine by trial and error because life do not give second chances. Forex do not have specialists for each trader but it do have demo accounts to go for trial and error till perfection of a system.