In the world of trading, there are many indicators. Most will be useless for your type of trading and some will be indispensable. Trying to find out which ones are right for you is of the utmost importance, to assist you with your trades.
New indicators are coming out all the time, with sophisticated properties which lure the novice into what is macd a false sense of security. Steer clear of these. The tried and trusted ones tend to be the best, that is why they have lasted!
So how many indicators should you use? – Well, you’ve heard of ‘analysis paralysis’ – this is where you have so many indicators that you never trade because you’re waiting for the correct ‘once in a lifetime’ alignment, where they all agree with your strategy!
Some traders I know do not use indicators at all, most use about two or three and some use more. What I’m trying to say here, is that you need to find a couple that you are comfortable with and then stick to them. Do not be lured to some fancy indicator because your friend seems to get good results from it. Two or three is definitely best to be going on with.
The most popular indicator is the ‘Moving Average’ line and even in Forex, there are few traders who do not use it. The difficulty is deciding which period to use, as this will depend on your trading time frame. A 200 period Moving Average or 200MA, may not be much use to you if you ‘scalp’ trade, but I use the 200 period for confirming the current trend. Along with the 50, 20 and sometimes the 10MA, these make up the first indicator that I find most useful. I will see how far the MA lines are extended from the current price, to assess how strong any trend is and trade accordingly.
Next is the dreaded MACD. Dreaded, because most traders don’t understand how to use it! I will not even begin to explain it here, just tell you what I do with it. I use it for what I consider to be a very important decider in whether I enter a trade or not: I look for bullish and bearish divergence. When comparing it with the price chart. I will look for a turn in price direction if the peaks (or troughs) in the MACD do not correspond to similar peaks in the price chart. This is crucial to my overall strategy, if this pattern in the charts is not there, I will not put on the trade.
Similarly with the RSI indicator, I will again look for the same pattern comparison with the price chart, which basically means that the two indicators of MACD and RSI ‘agree’ with each other, giving me a better chance of any trade performing well.
By using the combination of Moving Averages, MACD and RSI indicators, I can get a feel for what is happening in the currency pair and then trade accordingly. I may compare them to another correlating currency pair to confirm a trading decision.
I also use the ATR or ‘Average True Range’ to decide on the volatility of a currency pair. I monitor these on a regular basis on the six currency pairs that I trade. The ATR gives you an idea of how far each currency pair moves in say, a day, which can be very useful for assessing risk. If you know that the GBPUSD is likely to move 100 pips each day, you can seek out the range where it is likely to move and use it to decide on your targets and your stop losses. I don’t use the ATR ‘chart’ – just the daily numerical level for my calculations.