Technical Analysis. Used alone won't make you rich. Here is why Roman Sadowski
The lesson to take away from this part is: Don t rely too much on your technical indicators Keep it simple and move beyond it There is more to trading than a technical analysis Technical analysis is solely based on a self-fulfilling prophecy. Technical analysis encompasses a wide range of techniques used to try and predict the following move of a certain market. Technical analysis includes the use of pivot points, time cycles, trendlines, candlesticks formations, moving averages, typical chart patterns such as double top, head and shoulder, etc. There are a lot of different aspects to forex technical analysis. It is not my intention to give advice on which technical patterns or indicators are better than others, but more to share with you some of the observations. In addition to this, we will look into testing trading systems based mainly on technical analysis. First of all, it is important to understand that there is no magic to forex technical analysis, although it is often marketed in such a way. Technical analysis works only because it is similar to that of a self- fulfilling prophecy, and (in my opinion) nothing else. When this is taken into consideration, it only makes sense to use the most known ones and stay away from all the so-called secrets or new technical indicators, as an unknown technical indicator simply will not respond well to a self-fulfilling prophecy. A simple way to test the popularity is to do a search on Google for the name and look at the results.
How about fundamental analysis contra technical analysis; are there times when one supersedes the other? Yes, there is. ( more about it later ) The release of highly important forex fundamental data can be very dramatic events and technical analysis is of very limited use during these times. This is because the statistical techniques that technical analysis depends on are ineffective during the volatile times of the release and for about (at least) one hour afterwards. However, this all depends on the kind of news and the deviation from the expected number. But it should be kept in mind that these are definitely not good times to try and detect trends or their tops and bottoms. You are well advised to wait for calmer waters when technical analysis can be applied properly. As fundamental data releases can produce spikes of price movements in minutes, this is not the time to try and detect reversals although some traders try to do just that.
Fundamentally, technical analysis produces more reliable results the longer the time frame used. This is especially true when the trading is following a regular pattern such as during stable times. However, longer time frames can be more vulnerable to sudden sharp reversals, which is a serious problem. During volatile times, irregular trading patterns, much larger pip movements and spikes reduce the effectiveness of statistical analysis. The most popular timeframes used by most forex traders are the hourly, four-hourly and the daily charts. Very short time frames below 1 hour do not lend themselves to statistical analysis, very well. However, some traders do use them for other types of trading strategies such as scalping which is used by many expert advisors. The general idea behind any scalping method of trading is to reduce risk by getting into a trade and then out of it as quickly as possible. This type of action limits the risk exposure during a trade. This process is then repeated many times, always aiming for a small low risk gain. One of the main ideas of this strategy is to attack the markets during their off hours when they have settled into a tight and more predictable range pattern. The time period selected is between 9.00pm and 1.00am GMT. Typically the following currency pairs are traded: EURGBP, EURCHF, GBPCHF and USDCAD. Europe, UK, Switzerland, USA and Canada do not release any national fundamental data during this time period and thus the forex market can be very quiet with low volatility. However, as the liquidity is lower during these hours, the market is more prone to macroeconomic events, and it is important to keep in mind that large spikes easily can occur in these periods.
In addition to the specific timeframes, it should be noticed that Fridays often tend to respond poorly to any technical analytical approach, as well as fundamental news releases. Although I heard this many times before I actually started trading, I was still in front of my screen on a typical Friday. You can easily get chopped up in this trading period. One of the main reasons for this is probably that large institutions such as banks and hedge funds close their books for the weekend. It can be argued that they might be more prone to psychological aspects in order to reach breakeven or in an attempt to squeeze the last possible profit before the end of the week. No matter what the reason behind this phenomenon is, just know that technical indicators, as an unknown technical indicator simply will not respond well to a self-fulfilling prophecy. A simple way to test the popularity is to do a search on Google for the name and look at the results. Fridays can be a tough challenge. This is often true for Mondays as well, as a new week starts and a direction is to be decided on. You should begin to understand that using technical analysis as a central part of your trading strategy is not so easy as first thought and prone to difficulties. So how do forex traders attempt to overcome this serious problem? It is important to understand that many technical analytical approaches are rather useless, and especially so if they are applied solely as a trading strategy. You will need to devise a forex strategy that is wrapped around your limitations and facilities, and it should entail more than simply basing an entry or exit on technical analytical aspect, while you also want to make sure that you don t fill up your screen with too many different indicators.
Although a large number of the technical approaches are nothing but hot air, there are several technical Indicators that can be used to help you achieve a better trading foundation, including the ones listed below I wish I knew this years ago but instead I have spent years jumping from one indicator to another thinking that this time I will finally beat the game and become profitable. Today I know that technical analysis alone won t make me money. It matters to some extent but there is more to trading. Technical analysis attempts to understand the market sentiment behind price trends rather than analyzing fundamental attributes. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to make better trading decisions but used alone will not suffice to sustain gains in the long run. Here are few simple facts you need to know to accelerate your trading career 1.Technical indicators don t predict the price It is quite common among traders to over-use trading indicators. Inexperienced traders puts all his faith into indicators. Their charts are filled with boxes, windows, lines and more. Traders pay more attention to the indicators then to the price action itself. Some of retail traders would be very confused and most of them would not be able to trade without indicators I recall a screen filled with numerous indicator windows and watching them as a hawk to spot the best entry signal to enter the market.
2.Technical analysis will work only if many use it. There are a few indicators which are reliable. This is because big orders are placed around these level. These are Support and Resistance, Pivot Points, Retracements (Fibs). This is supply and demand and this is all you need 3.The price moves indicators not the other way around. This is why they are called lagging and this is why they repaint. This is why they always look profitable when you look at them at the left-hand side of the chart when the price action is already unfolded. 4.All indicators are derivative of the same data high, low, open, close. It is important to understand that any price indicator included in your trading software cannot represent anything else than the formula based on the data included in the software itself. There is no other data in your trading platform. All indicators are being fed by the same data hence they are the same. Platforms like Metatrader, Trade Navigator, E-Toro or any other software offer indicators built on the price archive. None of them reflect LIVE traders interaction with the price action at the major exchanges at the point in time. 5.Indicators and other tools are designed to help you with your strategy rather than being a strategy themselves. All trading tools and techniques including; Fibonacci, Elliott Wave analysis, momentum, pivots or all sort of indicators based on the past price action should be used only to narrow down the probability of a future occurrence rather than used as a core trading strategy.
I use only a few indicators, mainly leading ones as an addition to my price driven strategy. The starting point for me is always the Fundamental analysis measured by Commitments of Traders and Risk Events Calendar Before even thinking about entering a trend trade, I want to know where is the price likely to go in the long term, what is the sentiment on the market and what big institutional traders are doing. Here is great PDF I created on how to use Commitments of Traders to form your long term bias. Download it from the below link Commitments of Traders An Ultimate Guide The only indicators I recommend are: Multi-Time-Frame Stochastic Momentum indicator. This indicator draws me higher time frame stochastic on lower time frame, ( daily stochastic on 4 hrs time frame). I CONSIDER only long entries when the daily stochastic is oversold on lower time frames and short entries if the daily stochastic is overbought on lower time frame DOWNLOAD IT HERE ( Metatrader4 only) Pivot Points Over sold/bought indicator. Probably the oldest indicator on the planet. Draws the future levels based on the average price in the past. I exit my long positions around high pivot points and exit my short positions on low Pivot Points. I also use central Pivot Point as a reversal signal on lower time frames. DOWNLOAD IT HERE (Metatrader4 only)
Single Currency Strength Index This is a weighted index of the single currency. This allows me to use if the currency is strong or weak against the basket of other currencies rather than comparing in to another single currency DOWNLOAD IT HERE (Metatrader 4 only) Support and Resistance Supply and Demand indicator. Any successful trader has to have a thorough knowledge of support and resistance.i NEVER sell the support or buy the resistance. Only buy support in rising market or resistance in falling markets Fibonacci Retracements Retracement indicator. Measures potential retracement size. Markets tend to get exhausted around 38%-50% retracement zones most of the time. I consider 38%-50% retracement as a mature support zone and look to buy the rising markets. Candlesticks Supply and Demand indicator. Shows the sentiment and a struggle between bears and bulls. Best used on daily charts.engulfing candles show the sudden sentiment change on the market and often follows with lower or high prices. My MT4 template see how my charts look like DOWNLOAD IT HERE ( Metatrader 4 only )
Technical analysis alone won t do it. Don t spend years learning technical analysis thinking it will make you rich. You need to move beyond it as quickly as possible TIPS Do you know how accurate are the indicators you are currently using? Test all indicators you use in the MT4 strategy tester. You will be surprised with the results.