Should We Employ Indicators Used by the Majority?

Should We Employ Indicators Used by the Majority?

In today's active markets environment, traders have a wide variety of trading systems and technical indicators to use when constructing a trading plan that is meant to deliver success on a long term time horizon.  While it can be difficult to separate the “wheat from the chafe,” new traders will be required to do diligent research when looking at the strengths and weaknesses of any system.  Without this, new traders are putting themselves (and their money) at risk so it is important to make sure that any trading system has been well researched and tested under a variety of market conditions so that the system can be trusted when real money in put at risk.

It is important to look at the most commonly used and trusted technical indicators that can be found in the forex markets today, as this will give the best sense of what the rest of the market is thinking at any given moment.  Common examples include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and Stochastics. It is relatively rare to see a successful trader that does not use or at least monitor some element of these strategies on a regular basis.  So, it makes a great deal of sense (especially for new traders) to at least have a firm understanding of how each of these indicators and oscillators work so that you can have a better sense of what the rest of the forex markets is seeing and how accurate and successful trading strategies are actively constructed.

Starting from the Bottom

It can sometimes be very confusing for experienced traders when they see newer traders investing their money in technical analysis strategies that they do not understand and have not even attempted to research.  Why would any trader want to use a technical indicator if they do not understand the basic calculation that go into each signal?  Since the underlying math is not difficult to understand and takes very little time to research, it should be very clear that no trading strategy should be undertaken without at least a general understanding of the basics involved when these calculations are made, so first we will look at these basics so that the more advanced techniques presented later can make more sense.

Minority vs. Majority

“One of the classic arguments in technical analysis is over whether or not we should employ indicators used by the majority,” said Rick Bartlett, currency analyst at CornerTrader. Some expert traders want to use exotic indicators, because they feel this gives an edge on the market that most traders cannot see or comprehend.  But it is important to avoid this mindset, as it prevents you from seeing what the majority of the market is actually doing.  After all, it is the majority opinion that ultimately decides market prices so it makes sense to have at least some id of the current MACD, RSI, or Stochastics reading before any trades are placed.