Forex Technical Analysis, Indicators
Forex technical analysis and all of the associated indicators are confusing and wind up costing forex traders large amounts of time and wasted effort. Forex traders need to demand better trading systems with more logic and better trading results. This article will examine technical indicators used by forex traders, and suggest some simpler and much more effective alternatives.
Too Many Forex Technical Analysis Indicators
Web searches for "forex technical analysis" reveals a large set of confusing indicators. Trend lines, channels, patterns, bollinger bands, RSI, fibonacci, candlesticks, pivot points, point and figure charts, stochastics, oscillators, etc. and it goes on and on from here. It is endless, confusing and there is no logic behind any of the indicators, and forex traders are now worn out by all of this. The world of forex technical analysis has thousands of scenarios. There over 150 forex technical indicators and over 100 candlestick chart formations alone, and that is based on just one time frame or period setting. Here is a list of over 100 of the commonly used indicators. There is no way to verify the results of technical indicators on forex trading.
Forex technical analysis is very difficult to define, since there are so many possible combinations of indicators, and the end user has so much discretion. Technical analysis basically has hundreds of definitions or possibilities, and the forex traders who use it every day more than likely would each give you a somewhat different answer if you asked them to define it. So in practice the actual definition of technical analysis varies.
Just pick one indicator at random like relative strength index. This index can be applied to any one of 10 time frames and you can start with RSI 14 (period 14) and see if it “works”. If it does not “work” then you can try RSI 15, 16 then 17 then it pretty much goes on from there. There is an infinite number of combinations from there. But remember all of these RSI periods are on just one time frame!! You would have to start over and try RSI for various periods on a different time frame and then go through at least 10 time frames seeing if it “works” again. The result will be a lifetime of research from the start but at the end of the day there are no pips in your trading account, or possibly financial losses.
Who Is Pushing The Use of Forex Technical Analysis
Forex brokers push technical analysis very hard. This is because technical indicators encourage traders to trade more frequently and perhaps make a few pips, which is just enough for them to keep their accounts open. Many other education websites and forex forum websites push technical indicators, because these sites are loaded with click ads from brokers to encourage opening broker accounts.
These indicators have proliferated across the majority of forex traders because the indicators are conveniently located on all trading platforms. When a new trader opens up a live or demo trading account with a broker, there is an assumption that the technical indicators that come with the platform will help them to make pips. In reality the number of pips you can make with these confusing indicators is highly limited to a few pips here and there.
If you use two forex technical analysis indicators together with different combinations of periods and time frames you now have, mathematically, an infinite number of combinations based on different period manipulations and time frames. If you devote the proper time to seeing if any indicators on one period and one time frame works properly, it would take a couple of months to demo trade each scenario to see if that particular combination of indicators was effective, or in almost all cases, ineffective.
If you project this over 100 indicators and multiple time frames, you have just spent your entire lifetime seeing if a handful of indicators “work” and you never placed one trade you just kept testing and testing indicators with no proof anywhere that they actually work. Knowing that there are over 150 different indicators, 10 different time frames, and infinite combinations of period adjustments, I can say that actually defining technical analysis is now not even possible for most forex traders. Development of good forex technical analysis strategies becomes impossible and traders fall into this abyss, desperate for simpler alternatives.
Also, since 99% of forex traders use technical analysis or forex robots based on the same indicators we have just defined hundreds of thousands of traders wasting thousands of hours each testing indicators that don't work for months or years of their lives.
Does Forex Technical Analysis Work?
The short answer is no, you will never consistently make anything but a few pips with technical analysis and indicators. In a best case scenario it is hotly debated and highly disputed, but in real life they are completely worthless except for scalping a few pips here and there. The fact that this is hotly debated should be a warning sign to most traders. In order to prove something “works” you would have to get an independent research group or university students to design statistically significant tests in a controlled environment so that the specific indicators tested had a written procedure for use. Then a large group of traders would have to use the indicators correctly for a long period of time.
Then the results of the trading and the study following the strict guidelines could only be reported based on the market conditions during the testing period. The overall forex market conditions could be trending, oscillating or choppy and we know that the forex market condition varies over time among these three. Also defining the market condition would have to have exact criteria not subjectivity.
The results could then state that based on the test conditions and market conditions you got certain results, so many pips or so many stop outs, or a certain percentage of positive trades. The results could only be duplicated under the same test conditions and market conditions. If the market conditions change the indicators would no longer work. Once again as a retail forex trader you cant make this work because the market condition changes from month to month. Or every couple of months you would have to use a new set of indicators for that specific market condition.
You cannot say forex technical analysis works unless you can define technical analysis, in this case most currency traders cannot even define it. You cannot say that technical analysis works unless you can define “works”, defining “works” can be done but with strict limitations based on the exact indicator used, correct consistent use and within a defined market condition (which could change tomorrow). Once again if the market conditions change the indicators will no longer work.
How many forex traders are able to identify the market condition or when changing market conditions?? The answer to that is nearly none. This is because they are usually staring at a chart of one pair like the EUR/USD on one time frame and the technical indicator they are watching does not work anyway. You cannot identify the market conditions i.e, trending consolidating, etc., by staring at one time frame and one pair.
Up to now we have talked about how technical analysis fails, but we have not even discussed money management and human emotion considerations. But if anyone thinks that every single trader is going to operate any forex technical analysis indicator system the way it was intended is not being realistic. People are human, emotional and subject to many outside forces including greed and a list of about 10 other emotions that affect trading. This is the appeal of automated systems and robots in eliminating the emotions. But automated systems have a basis in technical indicators and you are back to square one of the endless testing of indicators that have no proof of success. Its an unending loop of failure.
Now you can see why so many forex market traders fail or quit with losses, or become extremely frustrated. Some prominent currency trading websites with users forums talk about having over 1500 forex trading methods available, all based on indicators, but this is not what traders need. Technical analysis of the forex market does not work because the indicators themselves do not work.
Fundamental Flaw Of Forex Technical Analysis and Indicators
When you apply a technical indicator to a pair you have already failed. You must first spilt any currency pair into it's two individual currencies and then analyze each currency in the pair separately to be a successful forex trader. For example to properly analyse the NZD/USD, split the pair into the NZD and USD and analyze each currency separately, to maximize your odds of success. Since all technical indicators are applied to pairs, all technical analysis indicators are immediately disqualified from ever working correctly, because they ignore the two currencies in the pair. Traders want a trading system that is simple and profitable, forex technical analysis indicators provide none of this.
Simpler, More Effective Forex Trading System
There is a simpler approach to forex trading that is far superior to technical indicators. This is based on the fact that currency pairs are comprised of two separate currencies. A much simpler approach to forex trading would be when one currency is strong on a pair and the other currency is weak to consider a trade. This basic approach is what we use in the Forexearlywarning trading system, and it works. Forex technical analysis indicators do not measure these individual currency strength quantities and the indicators are fundamentally flawed. Technical indicators do not take individual currency strength or weakness into account and therefore, can never really be effective.
Look at this simple market analysis and trade entry system in the image above. This live system is not tied to any technical indicators and works great for daily forex trading. The buy and sell signals are clear for the NZD pairs, and the NZD currency is isolated.
We also analyze the forex market trends every day using these individual currency techniques. For example, if we want to perform an analysis of the USD/JPY, we analyze all of the USD pairs together, then analyze all of the JPY pairs together. See the image below of how you would group all of the USD pairs together for an accurate analysis. The results of this analysis technique will give us the condition of the USD/JPY. We will know if the JPY is strong or weak, and if the USD pairs are trending or ranging, so we can prepare an accurate trading plans for the USD/JPY or any other pair. This analysis method can be repeated for any currency pair with just one moving average and is very simple.
If you start to add in things like audible price alerts to monitor for breakouts, then add in other things like the forex news calendar and scheduled news drivers, you have begun building a complete forex trading system, without and technical indicators of any kind. This great trading system is detailed on our website, and is the best forex trading system in the retail trading space.