TRADING STRATEGY
FX
PRICE, THE BEST TECHNICAL INDICATOR
What Is Technical Analysis?
Let’s step back for a moment and consider “what is technical analysis?” Technical analysis is looking at past prices or volume to predict the future. Forex traders use it as a means to identify potential trades, set criteria for entry and essentially time the market. It can be used on its own or in conjunction with other methods of analyzing the markets, including fundamental analysis. When we first
think of technical
analysis, top of mind is usually that huge library of technical indicators including the popular Stochastic Oscillator, Bollinger bands, Moving Averages, and Average True Range, to name a few. Te breadth of technical indicators is vast and wide and there’s a smorgasbord of choice for the wannabe forex trader.
Price Will Define Us Let’s strip away all the possible
complexity out there and think, well what is it that we’re really trying to trade? Well it’s not pullbacks in oscillators,
moving average cross
overs or other fancy combinations. We’re trading PRICE.
Price is what will determine whether we win, we lose, breakeven or destroy ourselves. Price is of paramount importance to us. With a clear focus on price we can see the wood from the trees. Price is where two parties have agreed to meet to exchange money and when looking at it in relation to recent prices, it tells a story of the battle that created it. Who’s in control; the buyers, the sellers or neither?
Speed Out Of The Gate
Technical indicators typically require a number to be selected for the period. Tat’s usually a number of days, hours or minutes. Tis variable can be short or long and the longer it is; the
longer the lag is before the technical indicator responds to the movement in price. For example, EMA(10). Compare this to price. Price is just price. It’s moving or it’s not. Its breaking new territory or it’s not. Price is raw data that does not need manipulation. It moves and responds in real time and that’s the movement we’re trading. Here’s an example. Let’s presume in scenario one you were going to enter long when the price closes higher than the previous day (up candle) and it breaks out of the high of the most recent down candle. Compare this with scenario two where you entered long on the opening of the candle following a cross of EMA(10) and EMA(20). You can see that in scenario one you entered much nearer the beginning of the upward move and there was a lot still leſt in it, whereas scenario two took a long time to put you in the trade. Both are trading the same move that reverses in the exact same place. (Image 1)
FX TRADER MAGAZINE July - September 2013 67
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