Why should a trader not always rely on trading indicators

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Why you should never rely on Forex indicators

Indicators can be very powerful trade filter tools. It can give you accurate signals and allows you to find the best trades. But things start to change when the traders start developing the trading strategy based on indicators. If you try to trade major markets based on the indicators reading, you are going to have a tough time. You can live your life in Singapore based on many professions. There is no reason to start using the indicators and look for quick profit-taking the opportunity in the Forex market. Let’s find out the key reason for which you should never rely on Forex indicators.

Table of Contents

Leading and lagging signals

The indicators give leading and lagging signals. For instance, if you rely on the RSI, you are going to get early signals. Executing the orders on the RSI reading is going to result in a big loss. Similarly, if you try to trade the market with SMA or simple moving average, you are just dealing with lagging indicators. You will get the signals after the market has given its big move. So, try to learn more about the leading and lagging indicators to make consistent profit from this market. After you learn these things, you will feel the change in you.

Indicators are not perfect

You should never think the indicators are the perfect tools. Noting is perfect in this world. The elite traders are losing money by following a premium strategy. To survive in the Forex trading industry, you must think about causality. Losing trades will be very common and there is nothing you can do to avoid losing orders. If you start to think the indicators are the perfect tools, you are going to lose most of the trades. To become a better trader, you must learn to trade the raw price data. Stop relying on the indicators reading as it increases the risk factors to a great extent.

Limits your learning potential

The moment you start relying on the indicators, you stop learning new things. Without learning new things about this market, it’s very hard to keep pace with the trend price movement. The majority of the retail traders are losing money since they stop learning after getting used to the indicators. Indicators are nothing but a tool that helps you to filter the market noise. If you make consider your prime trading tools, there is no way you can make a profit from this market.

Execution of precise trade

You must learn to execute precise trade to earn more money. Those who rely on indicator based trading strategy are losing most of the trades since they don’t know the perfect way to execute the trade with precision. If you want to make profit from this market , make sure you work hard to improve your trading accuracy. Try to learn about the price action trading strategy since it allows you to trade the real-time market dynamics. Most importantly you will become a confident trader after learning to use the price action signals. On the contrary, those who use the indicators always use wide stop loss and they never know why they are losing money.

Trade with low risk

By using the indicators you can’t reduce the risk. To reduce the risk, you must learn to trade the major level of the market. Focus on the trend line, Fibonacci and other important tools. Draw the key levels in the higher period so that you can execute the orders with precision. Things might hard and you might have the idea to lower the risk via manual trading strategy. But with the help of the demo account, you can expect to develop your skills. Forget about the EAs, robots, and indicators in the Forex market. Try to learn about the manual trading strategy as it makes you a better trader. Most importantly you will become confident with your trading approach.

Why You Should Ignore Fundamentals When Day Trading

Whether you day trade forex, stocks or futures, don’t get distracted by fundamental analysis. While fundamentals are relevant to long-term investors, day traders will likely find that fundamental analysis does not improve their performance on short-term trades. Most successful day trades don’t concern themselves with fundamentals. Here’s why.

Fundamental Analysis Is Irrelevant on Short Time Frames

For a trade that last five minutes, what is on a company’s balance sheet isn’t going to matter much. A company can have horrible financial statements, and yet for months on end, it can rally. A company can be strong financially, with great earnings, and yet some days the share price will drop like a rock. The point is, fundamentals don’t matter on short-term trades.

Anything can happen within the very short time duration of a day trade because the price is always moving, both up and down. As day traders we don’t need to know anything about the financials of the company we are trading. Such data will only serve to distract us. If you do know about the financial position of a company, don’t let it bias your trades. As indicated, anything can happen during one day, and especially during one trade.

Day Trading Profits Don’t Rely on Fundamental Analysis

As a day trader, the primary goal is to consistently implement a trading plan. Researching how bad or good a company is doing only blinds us to what is happening on the only real piece of timely information that matters–the price chart of that company (or forex pair or futures contract).

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The price chart tells us exactly what an asset is doing at any given time. By analyzing the price chart we can find trade setups based on our trading plan. If a trading plan or strategy has been proven profitable, then there is no need for fundamentals. Day traders are better off trading and formulating strategies based on repeating price (chart) patterns that occur every day and leaving the fundamental trades to long-term investors (who aren’t worried about minor intraday price fluctuations).

Fundamentals Are Not Timely Like Charts

As indicated above, your charts tell you exactly what is happening now. That’s what matters to a day trader. We don’t need to worry about where a stock price will be 10 years from now (like an investor does), we only need to worry about right now. Various economic indicators are released every few days, and company financials are released each quarter. The infrequent occurrence of these data points makes them of little consistent use to a day trader.

Instead of reading financial statements and economic reports, day traders practice their chart reading skills, finding trade setups and implementing their trading plan.

Short-Term Reactions to Fundamental Data Are Not Always Predictable

It would seem reasonable that if analysts are expecting a company to generate $1/share in earnings, and instead the company produces $1.05/share, that the stock would go up. Yet this isn’t always the case. How the market will react to a fundamental data point (whether economic or company/commodity-specific) can be seemingly random. Sometimes a good result can send an asset plummeting lower (if people were expecting an even better result) or a bad result can send an asset higher (if the bulk of traders thought it would be worse). Many day traders get seduced into thinking they can predict how an asset will move based on what they think the fundamentals will reveal and/or how the market will react to it. Many day traders have gone broke attempting this. If we can’t predict the outcome of the news with a good probability (and good risk/reward ratio) then it best to just leave fundamentals out of our day trading.

The One Time to Monitor Fundamental Data

As a day trader, there is no need to follow the news or be aware of the underlying financials of a company or the economy. We do need to know when earnings or economic reports are released though. While the actual numbers related to these releases don’t matter to most day traders, these news events can cause big swings in price as both short and long-term traders to react to the news.

If day trading U.S. markets, the Bloomberg economic calendar provides a schedule of news releases and important events that could affect the market. Stop day trading about 5 minutes before, and for about 3 minutes after (sometimes longer if the price is moving wildly), the news release. Focus on capturing normal movements that occur every day; don’t get greedy and try to predict how the market will react to a high impact news release. Often the price will move aggressively in both directions, stopping you out before the market establishes a more sustained trend.

The same concept applies to forex trading. Step aside for high impact news releases. Since the forex market is global, be aware of all high impact news events that may impact the currency pairs you are trading.

If day trading stocks, be aware of scheduled company announcements in the stocks you are trading, such as earnings announcements. Stock traders should also be aware of major economic data releases, and step aside during those times as well.

Final Word on Day Trading and Fundamentals

Fundamental analysis is a tool primarily used by long-term investors. It is not a timely resource for day traders since there is a long lapse between when these data points are released. Also, on any given day or minute a stock can rise or fall despite what the fundamental data indicates. While fundamental data releases can cause big price moves, the direction and magnitude of those moves are hard to predict with any certainty. Therefore, day traders are better off stepping aside during news releases and not attempting to perform fundamental analysis. Instead, stick to trading ​the price patterns that occur frequently throughout the day in a particular market.

Why New Traders Should Start With Price Action Trading (And Not Indicators)

Active trading doesn’t have to start with learning complicated formulas of technical indicators. For a new trader trying to understand the market, price action trading is a superior choice.

You won’t hear this from experienced traders who are using indicators. But this is not because they want to mislead you.

It’s just that they’ve been trading long enough. Thus, they’ve overcome the initial shortcomings of indicators. Most of them cannot imagine how it would be like if they had started with price action trading instead. Hence, they cannot appreciate the benefits of price action trading for a novice trader.

In that case, why do I conclude that price action trading is a better choice for new traders?

I’ve spoken to many aspiring traders. Those who started with price action trading tend to have realistic expectations. Those armed with an array of indicators tend to search for the Holy Grail. They want to find the magical combination of indicators and settings to make money immediately. Their favourite question is what parameters should I use for MACD/RSI/CCI/ADX?

Countless traders wish that they had started with price action instead of indicators. Yet, I’ve not met a single trader who wish that he had started with indicators instead of price action.

Read on to understand why, as a new trader, price action trading offers the best launchpad.

Price Action Trading Saves Your Time

Becoming a consistent trader is a long journey. It takes at least a few years of intensive effort. As a new trader, time is precious.

You should focus on studying the market. You should spend your time observing the market. A simple approach like price action trading allows you to do just that.

Price is the only thing you need to focus on. It helps you to avoid distractions. With a singular focus on price, it’s easier to learn how the market behaves and speed up your progress.

To learn price action trading, you need nothing more than a basic charting platform. You do not need to check if the platform has the indicators you need. You do not need to verify if the indicator you bought will work in your trading platform.

You can start examining price bars straightaway, and sustain your learning momentum.

If you start with indicators, you will encounter complicated formula with infinite possible parameters. You will waste time selecting indicators and trying out different settings.

With indicators, new traders tend to go on a wild goose chase before learning how the market behaves.

Price Action Trading Encourages The Correct Attitude

To a new trader, indicators make trading look easy. Trading is about waiting for the RSI indicator to fall below 30 before you buy. The next step is of course to sell when the RSI rises above 70. Simple and neat. Trading is easy, except that it’s not.

In essence, indicators cause a new trader to focus on signals. And signals prompt the trader to trade. This is a bad start into the trading profession. Why?

This might sound paradoxical. But for a new trader, the first thing to learn is when not to trade.

You should observe, study, and analyze the market. You should learn to recognize what is going on in the market and pay attention to the market context. Trading comes after you are able to read the market.

Seasoned traders know that trading signals are secondary. If you can get the market trend right, there are dozens of ways to enter the market.

However, most traders learn this the hard way. Right from the start, we waste a lot of time chasing after trade signals instead of studying the market’s big picture.

In this aspect, price action trading is helpful. It instills the importance of analysis. Watch each price bar as it forms, and interpret its impact on your market hypothesis. This is how you learn price action trading.

This approach emphasizes analysis and patience, instead of buy and sell signals.

Price Patterns Highlight Trade Risk

A price action trader uses price patterns to enter the market. Most price patterns have an implied stop-loss level.

A bullish price pattern suggests that the market will rise. Hence, the market should not fall below the price pattern. If it does, the price pattern has failed and it’s wise to exit the trading position.

The same logic works for a bearish pattern. Look at the Trend Bar Failure example below. If the market rises above the high of the pattern, we know that the price pattern has failed and it’s time to cover our short position.

Each price pattern has a natural and logical stop-loss point. As you pick up price patterns, you are naturally exposed to the possibility of losing trades.

This is the key. New traders need to embrace the reality of inevitable losing trades as early as possible. And learning about price patterns is a great first step to appreciating trading risk.

On the other hand, indicator signals do not have an obvious stop-loss level.

For instance, you bought after the Stochastic indicator turned up from an oversold level.

When does the signal become invalid? At which price level will you concede that the signal has failed? These are important questions that beginners will not think of asking.

A prudent beginner might understand the need to limit risk. However, there’s no obvious method to place stop-losses for indicator signals. Hence, many novices resort to setting their stop-loss based on how much they are willing to risk.

Price Action Trading Or Indicators

Do not take the above to mean that indicators are useless and evil.

Indicators are not useless, but they are more useful to a trader who appreciates price action.

Aspiring traders often focus on the wrong things. They focus on trading, strategies, and perfection. What they should learn and appreciate are analysis, risk management, and patience.

Price action trading encourages the right trading perspective. For this, it is well-suited for beginners.

But as always, the trader is the most important piece of the puzzle. You can rely on price action but still focus on the wrong things. Price action trading makes it easier, but you need to make it work with the right mindset.

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