Anyone who has followed my forex trading educational material for any length of time knows that I do not promote the use of indicators as one’s primary market analysis or entry tool. This article is going to explain exactly why trading with indicators and signals. So, forget about the confusing haphazard mess that indicators leave all over your charts and let this article open your eyes to the power and simplicity of trading with pure price action.
The root of the problem with using indicators to analyze the forex market lies in the fact that all indicators are second-hand; this means that instead of looking at the actual price data itself, you are instead trying to analyze and interpret some variation of price data. Essentially, when traders use indicators to make their trading decisions, they are getting a distorted view of what a market is doing. All you have to do is remove this distortion (the indicators) and you will obtain an unobstructed view of what price is doing in any given market. It seems easy enough, yet many beginning traders get suckered into clever marketing schemes of websites selling indicator based trading systems, or they otherwise erroneously believe that if they learn to master a complicated and “fancy” looking indicator they will for some reason begin to make money consistently in the market. Unfortunately this could not be further from the truth, let’s begin by looking at the two main classes of indicators and discuss why they are flawed:
Let’s take a look at the way many traders try to trade with lagging and leading indicators all over their charts, and then let’s compare this to trading with nothing but a plain vanilla price chart and price action. Below is the EURUSD daily chart with some of the more popular indicators; stochastic, MACD, Parabolic SAR, and a few moving averages. You can quickly see just by looking at this chart how confusing it is, and you can also see that there are a lot of unnecessary variables on this chart.
As we can see in the above two images, the clarity that you get when trading off indicator-free, pure price action charts, is very obvious and significant. Being focused is very important as a trader, when you have 5 different indicators on your charts all telling you conflicting messages, this simply does not contribute to a focused and clear mindset, but rather it induces confusion and indecision. Having less parameter to analyze causes your brain to work more efficiently and allows you to rely more on your own natural trading instincts. These trading instincts become fine-tuned and fully developed when you learn to read price action on a “naked” price chart, and as you become a more proficient price action trader eventually you will develop the ability to make trading decisions with increasing degrees of accuracy and less effort.
Let’s actually dissect two of the more popular indicators out there; Stochastic and MACD, and then compare them to trading with pure price action. The Stochastic indicator: “There are two components to the stochastic oscillator: the %K and the %D. The %K is the main line indicating the number of time periods, and the %D is the moving average of the %K. Understanding how the stochastic is formed is one thing, but knowing how it will react in different situations is more important. For instance:
From the above two descriptions of the Stochastic and the MACD indicator, we can see it almost hurts your brain physically to read all the parameters involved in calculating them and how exactly they are to be used. The over-arching theme of such indicators is that you have to follow specific rules to use them. This means you have to be sitting in front of your computer waiting for the indicators line up exactly right before entering a trade. Many traders combine 2 or more indicators and require multiple signals to “line-up” on each indicator before taking a trade. You can see how quickly this jumble of messy and overly-complicated lines, colors, and signals all over you charts can confuse you and even cause you to panic in frustration. I actually got a headache just doing the research for this article because I know that indicators like these are so pointless and unnecessary that it hurts my brain to think about it.
If it is not extremely obvious by now why price action trading is a far superior forex strategy than any indicator-based strategy, it should be. If you want to truly understand price dynamics and the mechanics of financial markets, you need to learn to analyze price action on an indicator-free price chart. Even if you don’t go on to become an expert price action trader, you still need to have a solid understanding of how to analyze a “naked” price chart and how to trade with nothing but price action and important levels in the market. If you end up using some other trading strategy or system, your knowledge of price action and how to trade it will only make that strategy or system more effective. The bottom line is that indicators make you lazy because they lull you to sleep in believing you don’t really need to do any work or learn anything besides how to read your “mechanical” indicators that will tell you what to do and when to do it. Price action is great because you can form decisions about future outcomes and direction with greater accuracy and speed than any other trading method because price action is the most current market analysis tool there is. Eventually your brain and subconscious will sync up together and trading off pure price action setups will be like riding a bike; once you adapt to it you will be able to ride it very well and it will become like second nature. Price action is the most clean and logical way to analyze and trade the forex market, learn to trade off price action sooner rather than later if you want to get your trading on the right track.
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