Month: February 2014

Many Forex trading strategies rely on indicators. However, indicators are not ideal solution and there are different approaches, e.g. price action trading.

The authours of a popular book “Naked Forex: High-Probability Techniques for Trading Without Indicators” suggest that indicators are not useful, but instead prevent a trader form entering or exiting the market in time.

Of similar opinion is a famous trader Raghee Horner. In her book, “ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street”, she states that she doen’t use indicators for entering and exiting the market, but only as a means of confirmation of the market direction.

Indeed, doing Forex trading without indicators sounds very logical. There is an inherent problem in all indicators – they are lagging the market. I.e. the more informative the indicator is, the later this information is available.

This resembles the well-known “uncertainty principle”. The combination of profit and certainty appears to be a constant. The more certain you want to be in the market move, the longer you have to wait, Consequently, the less profit is left to be taken when you enter the market.

That said, we need to point out that everything is, of course, relative. Indicators used in day trading are less lagging. But, on the other hand, market moves are smaller during the day. So the importance of quick decisions is higher. And the main idea persists.

Another problem is that indicators can’t provide the most important information – when the market nature changes. Take a look at the test scenario example #2 where the trading strategy used was to look for a top or bottom after the RSI exceeded 70 or dropped below 30, correspondingly. As you see, this strategy failed when the powerful uptrend started.

As known, in this case RSI can grow significantly over 70 before the top is reached.

We will run the scenario in the above example without using RSI.

Meanwhile, you can check out our price action software that implements an algorithm for detecting market turning points.

Read more on price action trading in Forex not using indicators.