FOREX TRADING

Many people think that the answer to trading lies in using the right indicators. Some people will not agree but their actions will tell you so. Because the first question they always have is “What indicators do you use?”

For a long time, I was stuck in finding the right indicator as well. I thought that if there was an indicator I could just follow blindly, that would meant my success in daytrading.

There are such systems, but they’re not cheap. I don’t have that much of capital to start with.

Hence, I have to go the hard way to look for the ‘right’ indicators.

I’ve lost alot of money in trading before, and most of the time was due to the misuse of indicators.

How would you make use of indicators in your trading?

For most people, daytrading meant waiting for a trend to start, wait for the trend to confirm, and pulling the trigger.

When does your indicator come into play? Is it to tell you when the trend has started, confirmed, or give you a safe, low-risk point to enter?

By reading my question above, you would have already guessed it’s the last option that is correct. I will explain why.

The first thing you must remember is that indicators are always lagging, no matter how they’re configured or called. All indicators are derivative of price and price only. By calling an indicator ‘leading’ doesn’t make it lead the price whatsoever. Some people would argue that leading simply means plotted ahead of the chart. That doesn’t make any difference.

If you use indicators to tell you when the trend is starting, you will constantly be wiped out by whipsaws, especially if your indicators are not tuned properly. If they’re too sensitive, you might get 22 trend changes in 1 minute. If they’re too slow, you might lose an opportunity when the trend has taken off quite a bit.

If you use indicators to tell you when the trend is confirmed, you might potentially lose out on some opportunities as well. But that depends on how you tell it is confirmed. For example, many people use a long-term and a short-term line to tell them when a trend is confirmed. If the shorter term is on top of the longer term, it is an uptrend. This is a well-established way, but sometimes you might not be able to catch the action in time, because of the fact that both lines are lagging. For a less lagging line to catch up with a more lagging line would take up some time and you might be near the end of the trend when that happens.

If you use indicators to tell you when to enter, you would enter at dips in uptrends or rallies in downtrends most of the time. This may not be the best entry points sometimes, because the dip or rally may be a reversal, but coupled with indicators and the first 2 steps of identifying and confirming the trend, you might just get a low-risk entry point most of the time. It may not be high-probability, but it is definitely lower-risk.

What’s the difference between probability and risk? In my context, high-probability means winning 7 out of 10 times. Low-risk means putting your stop loss at $100 while looking at a potential profit of $300.

A high-probability, low-risk opportunity is hard to come by. I feel that it is easier to score 4 out of 10 times, with a profit margin of 3:1 rather than score 8 out of 10 times, with a profit margin of 1:3. It is up to the individual trader to work out his/her style.

The fact is, people who go for lower-risk are more consistent over the long term. If you look around, most consistent traders are that way, whether you disagree or not. Statistics presents itself as what it is.

Think about the way you trade and constantly work out your probability and risk. Most importantly, use your indicators correctly.

Check out my trading blog at http://peaktoosoon.wordpress.com. I day-trade the Russell Mini futures contracts and also swing-trade US stocks. My methodology is simple and will be something that you already know. The difference between me and most people is how I approach it.

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