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PR17 - What are the Best Types of Technical Indicators in Forex?

"In the world of trading, Holy Grail is a term that is often used. A holy grail is a trading system or a technical indicator that can generate profits. But in reality there is no such trading system that can be profitable 100% of the time. Traders tend to often wonder or continue to seek the best technical indicator in trading. The truth is that such an indicator or a trading system seldom exists. To be profitable with forex, traders should firstly understand that losses are something that cannot be avoided. This is true for even the best and the most experienced traders of all times. Instead of seeking for the best technical indicator, traders should firstly understand how the different technical indicators work and what information they convey. In this article, we look in depth into how technical indicators work and why there is no such thing as a best technical indicator."

As traders, at some point or the other you might have come across the question as to whether there is a best technical indicator out there. This is because traders always dream about the perfect technical indicator that will make money for them.

In trading terms, traders make use of different technical indicators in order to build a trading system. The general aim is to use this technical trading system in order to build a profitable way to make money in forex trading.

However, the truth is that there is no best technical indicator that can be used which will make money for the forex trader. The reason why traders come up with these questions is because they do not have a good understanding of the forex markets or how to use technical analysis in trading.

Understanding the different the different types of technical indicators

Although all technical analysis is based on indicators, there are different types of technical indicators that can be used. No matter what type of technical indicator you use, they fall into one of the following categories.

Oscillators are the most commonly used types of technical indicators. These are mostly momentum indicators. The oscillators typically oscillate around fixed levels which could be +100 or -100 or oscillator around the zero level.

Depending on how the oscillator behaves, buy or sell signals are derived.

Volatility based indicators are those that measure volatility in the price. The volatility shows how much price can move in a certain direction. Volatility usually comes ahead of a big price move. Once the volatility sets in, the price of the security more or less can establish the trend or even reverse or correct the prevailing trend.

Trend based indicators as the name suggests is used to determine the trend of the price of the security. The trend based indicators show whether the price is in an uptrend or in a downtrend. This can occur depending on how the average price has moved for the lookback period.

Traders make use of a combination of one of these various indicators in order to build up a trading system. The various indicators from one of the above categories allows traders to understand the complete picture.

For example, traders can understand whether the trend is up or down and also know whether the momentum will keep the trend going or if a correction is due to take place. The volatility indicators allows traders to understand how wide price can move. This can in turn allow traders to adjust their stops or target levels.

Why is there no best indicator?

If you are still wondering where there is no single best indicator, the reason is that it is impossible to account for everything. Indicators can either measure trend, volume, volatility or momentum.

If you want to build a technical indicator that combines all the above, then it means that you will be looking at building a technical trading system rather than an indicator.

Of course, having said all of that, the best indicator is of course price itself. Remember that all indicators are based off price. Price, be it closing, open, high or low is then input into a technical indicator.

Based off this, the remainder of the indicators start to automatically plot the values. As a trader, it is therefore important that you understand how price works in the first place. This means, getting a good understanding of the price action of the security being analyzed.

You will also need to make sure that you have a gull market context of the indicators in questions.

If you keep looking for the best indicator then chances are that you won’t find any. Rather, getting the full context of the markets which means having to account for price plays a big role rather than focusing on just the technical indicators.

Many traders tend to fall prey to the aspect of the holy grail. The hoy grail is a name given to a trading system that generates profits all the time. However, in most cases there is no such indicator that can do this.

Traders tend to seek the holy grail indicator or a trading system. But remember that losses are an integral part of trading. There is no single technical indicator that can generate profits all the time.

Similarly, there is no single best technical indicator that can always generate buy and sell signals that are 100% accurate. If you want to be successful in trading forex, then you should learn how to understand price action and also how the technical indicators are derived from price.

Read 668 times Last modified on Sunday, 14 July 2019 09:00

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