Thursday, October 25, 2012

Forex Trading Indicator Cheat Sheet

I was just working with a new student this week who was asking a lot of questions about indicators. So to answer all his questions, I put together a little “cheat sheet” of indicators and a very basic description of what they do. Now, keep in mind that this is just a “cheat sheet” and just scratches the surface of what these indicators do. They were all invented by some pretty smart people, and an entire book could probably be written about each and every one of them… but I’m not much of a book writer. So a VERY short synopsis is what you get.

I also want to chime in with my own two cents: Most of these indicators are NOT needed. I personally use a few of these in my trading methods, but what I do is I use very common indicators like a few of these, and I use them in very UNCOMMON ways. But you’ll have to check out a few of my trading systems to fully understand what I’m talking about. But at the end of the day, the truth is you don’t need every one of these indicators. One or two could be helpful if that’s what your trading method and trading tactics call for, but rarely do you need to use all of them at the same time. I often see many of my students suffering form indicator overload. I take a look at their trading platform and it looks like a video game gone wrong. I’m a big advocate of keeping things simple and uncomplicated. There’s no magic trick to being successful trading forex, and adding a bunch of indicators is not going to get you the results you want. Using a method and staying disciplined with it is what brings you success. But enough lecturing from me, here are your indicators and what they do:

Bollinger Bands: These are lines that are drawn on your chart and act as little support and resistance level indicators. They are more or less volatility indicators but can be useful to those who are working off of support and resistance levels and have a hard time spotting them.

MACD: This is a two line indicator that uses two moving averages (fast and slow) and helps spot trends. The only issue I have with this one is it tends to have quite a bit of lag because of the two averages, so it’s more historical than anything.

Parabolic SAR: This is an indicator that spots trend reversals (SAR = Stop and reversal) and is pretty easy to follow because it shows you only bullish or bearish goals. When the dots are above a candle, sell, if they’re below, then buy. Simple as that.

Stochastic: Now this is an indicator I end up using in a lot of my methods and I think it works pretty well. What it does is it tells you when there are cases of something being overbought or oversold.

RSI: RSI stands for Relative Strength Index, and is very similar to stochastic. Same information, I prefer the stochastic.

ADX: Average Directional Index. This is another trend spotting indicator and can be very helpful if you know how to use it. What’s good about the ADX is it tells you the “strength” of a trend which can help validate a trade you’re thinking about entering.

IKH: This stands for Ichimoku Kinko Hyo and is a “price momentum” indicator.

There are many many more indicators, but that’s all I have time for today. Again, if you’re interested in learning more about any of them, I highly recommend getting a book or at least doing some web searches as there is a LOT to know about all of these. But at least now you’ll be able to hold your own at the next trader’s cocktail party.

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