Sunday, February 25, 2018

Forex Technical Indicators: Know Their Limitations

November 14, 2010 by  
Filed under Forex Strategy

We forex traders look at technical indicators to determine when we should enter or exit a trade. Using Technical indicators,like MACD, Moving Averages, Bollinger Bands and many more, are perfectly fine. Just that many forex traders put too much weight on them. This isn’t healthy when it comes to their trading.

Successful forex traders know that using these indicators apply them mechanically in their trading does not work. They also know that using them to create a buy or sell signals or entry or exit points is simply does not work that well. To them, these technical indicators are just a portion of their trading forex strategy.

Let’s look at an example.

Moving Averages (MA) are suppose to show the direction of the trend in forex market. The most commonly used are 200day Simple MA (SMA), 50day SMA, and 13day SMA. Some forex traders say that when a 50day SMA cross above 13day SMA with the price below 200day SMA, that is a good short trade. It is the same goes for the long trade. (13day SMA cross over 50day SMA with the price above 200day SMA)

The issue with this method of trading is that it does not happened frequent enough for forex traders to exploit it. We love to trade as often as possible, taking small profits each time. Or let the profit run and get a huge profit in a single trade. However, this method of forex trading could make day traders to chase after the market, waiting and hoping for a cross. Doing this will cause you to be distract from the market trend and intention.

Forex technical indicators also give other troubles. Things like with the quotes and prices that broker give to you. Forex brokers are market makers. Therefore different brokers give you different quotes and prices at a particular time. Therefore, it is possible that different traders get a different prices, although they are trading the same market and having the same indicators. However, the indicators gives them different responses.

Yes, most of these technical indicators were created, used and developed by people whom trade stock markets. Computers and software advanced are growing so fast, it is very natural to have someone to create these trading software “robots”, which uses technical analysis, to gain profit from the forex market. However, we, forex traders, should be mindful that even with these indicators, software and many many other automated support, they were created where real time information did not exist. Therefore, limitations of these technical analysis become more and more exaggerated.

In the final note, successful forex traders have already understand technical indicators’ weakness. They have realized that technical analysis should just one portion of their trading strategy. A survey was being done by in a international Forex market event, where major banks and institutions that has big influence on the currency market. The results shows that 41% of these powerful forex traders uses fundamental analysis, while 26% of them uses technical analysis.

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One Response to “Forex Technical Indicators: Know Their Limitations”
  1. In most of the talks conducted by active traders in Singapore, they said all the common indicators in the market do not work well. Only one they are okay with is the simple moving average indicator. They prefer trend-lines and looking at the price action.

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