Technical Indicators - Some Mistakes To Avoid
Technical Indicators
Many forex traders use technical indicators to help them make trading decisions and on the whole they are very effective. You can of course use price on it's own but it's much easier to use some other indicators as well. There are, however, a few mistakes that a lot of forex traders make when using these indicators.
The first mistake is that many traders simply use too many. This is very common and stems from the fact that a lot of people believe that the more indicators they use, the more successful they will be due to better trading signals.
This sounds like a good plan but unfortunately the end result is often that too many indicators simply creates confusion. The more of them you use the more chance there is that some of them will give conflicting signals. Therefore rather than confirm a potential trade they will often raise doubts and keep you out of otherwise solid trades.
A much better strategy is simply to pick a few solid and reliable indicators and build a trading system around them. So for instance you could use a few of the most popular ones such as MACD, Moving Averages, Stochastics and the Relative Strength Index. These are all very effective and will help you to develop your own profitable system.
An important point to make is that when choosing which indicators to use, you do not necessarily have to use the default settings. Very often you will find that you can increase the effectiveness of a particular indicator by tweaking the settings to suit your own particular trading method. A lot of default settings are regarded as the most widely used settings and will therefore satisfy most traders, but you can often improve your success rate by experimenting and back-testing using different settings, particularly if you trade forex using very short time frames.
You can use technical indicators across any time frame, but in my experience some of them will work better as you increase the time frame used. It's not always the case but on the whole technical analysis is more reliable on longer term charts because you cut out a lot of the random and volatile short term price moves that distort many of these indicators.
So to sum up, you basically want to use a small number of indicators because this will prevent a lot of false and conflicting signals, and you should also play around with the settings of each of these indicators to increase their effectiveness. Finally if you're still not having any success, try increasing your time frames as technical analysis works much better on the longer term price charts.
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