Should You be Using Indicators in Your Forex Trading?
Indicators are used in all global markets as a way to highlight potential trading opportunities within the charts. Indicators have been favored by traders due to their ease of use and lack of human error associated with them. However, indicators have got a bit of a reputation of being utterly useless within the markets and potentially cause traders more harm than good. So, should you be using indicators in your trading?
Indicators can be useful on forex trading charts in moderation. Indicators should not be used for building a trading idea, rather just adding one piece of confluence to an existing trading setup.
In this article, we are going to look at exactly how you should be using indicators, which indicators you should be avoiding and which indicators can enhance your trading. So, let’s get into it…
Indicators In Forex Trading – Should You Be Using Them?
Indicators are visual aids placed upon trading charts to give traders a better insight into what the market may be doing. This is, in theory, great for traders that are newer to the markets and don’t have their eye for technical analysis and price action yet. There are thousands of indicators that you can overlay on your charts, some of which are useful in certain situations and most of which will provide no value at all. However, we’d recommend you hold indicators in the same light as technical analysis. In order for technical analysis to work consistently, there must be a level of risk management and fundamental knowledge to accompany your analysis.
This works in the same manner with indicators – there must be more to your trading setup than just an indicator as confluence! If indicators worked in this manner, everyone would be a millionaire from trading by now. Many of our Elite Funded Traders do use indicators to help build confluence, but never as their whole trading plan for becoming funded traders!
How To Use Forex Indicators In Your Trading?
Indicators should only and always be used with other technical confluences. The price will never move due to the placement of an indicator, so you must have more to your trade.
Let’s take this example on USDCAD…
At a first glance, traders would say that the price fell due to the Fibonnaci rejection of the 0.5 level. However, this isn’t the case…
By moving to the daily chart, we can see that the Fibonacci indicator was only one part of the story.
There was in fact:
- A large bearish trend on the daily.
- A trend line break and retest
- EMA crossover (We have an EMA trading guide here, which may be useful)
- EMA retest
- Structural lower low
So there was certainly much more at play than solely relying on one indicator to give us a trade idea!
Which Indicators Should You Be Using?
If we are working off the assumption that indicators are useful for traders, there are some that you want to be back testing and potentially incorporating into your trading strategies. It’s worth noting that before trading with any indicators in a live environment, you should conduct a thorough back test.
Here are the most useful forex indicators:
- Moving Averages
Moving Averages (MA) or Exponential Moving Averages (EMA) are great tools for traders to use to gauge market direction and potential pullbacks. During a trend, the market will frequently pull back to the moving averages, providing a range of trading opportunities. The larger the EMA/MA, the more data the indicator is working with.
The Fibonnaci is a great tool for measuring the size of potential pullbacks during a trending market. This can help you frame your risk management within trades and potentially even allow you to estimate where trends may continue on to, based on the size of the pullback.
You’ll notice that both of the indicators mentioned only have use during a trending market – this is something you’ll see across the board. Indicators are extremely unreliable during a consolidating or ranging market.
Which Indicators Should You Be Avoiding?
We’ve acknowledged that indicators do have a place in trading – however, most indicators are not worth using, and there are several reasons for this.
Here are the 3 types of indicators you should not be using on your charts:
- Repaint Indicators
Some indicators will ‘repaint’ their analysis as price moves. This makes the indicators look extremely useful when looking at past data, as they’re accurately predicting every swing high and swing low in the markets – however, they’re actually useless when used in real time!
- Complicated Indicators
Indicators that have proved their value over the years, such as the Moving Average, are based on simple math that a trader could work out themselves manually if they wanted to. There is now a wave of complex indicators in the market using incredibly strange math, or keeping the logic hidden from traders. These indicators should be avoided at all cost – you cannot trade based on the input of an indicator if you cannot verify the logic of said indicator.
- Paid Indicators
Many companies now sell trading indicators that look great in their demos. In the majority of cases, these indicators are rehashed versions of free indicators, or they’re repaint-based indicators, meaning they cannot be used in real time. You should not waste your money paying for indicators from unprofitable traders! Many of our prop firm funded traders like to trade using naked charts, or perhaps just one indicator occasionally to frame entries!
Why Are Indicators Not Useful For Forex Trading?
The primary flaw of indicators is that they have no real bearing on the market. Economic news and fundamentals are what drive price movement in the charts. Traders can become too fixated on finding the perfect combination of indicators or believing that a trading setup ‘has to work’. All because a number of indicators line up, that they run themselves in circles and fail to make a profit in the markets.
If you speak to professional traders, they will more or less all mention the fact that you will not find success purely from looking at charts. The charts are the easy part, learning the psychology of a trader and fundamental analysis is a much harder task!
To wrap this up, it’s not that indicators are completely useless, they have a purpose – you must just be aware of the fact the market does not respect indicators, nor does price movement have any relation to your indicators!
In Summary – Should You Be Using Forex Indicators In Your Trading?
In conclusion, forex indicators certainly have a place within trading, but should not be relied on for trading ideas. Indicators should be used with fundamental and price action analysis, to add further depth to a trade – rather than being a leading confluence.