Forex Tips

Tip 1. Gamblers go to casino. All unproved, spontaneous actions in Forex trading — are a part of pure gambling.Any attempt to trade without analysis and studying the market is equal to a game. Game is fun except when you are losing real money
Tip 2. Never invest money into a real Forex account until you practice on a Forex Demo account! Allow at least 2 month for demo trading. Consider this: 90% of beginners fail to succeed in the real money market only because of lack of knowledge, practice and discipline. Those remaining 10% of successful traders had been sharpening and shaping their skills on demo accounts for years before entering the real market.A good demo account to start practicing with could be, for example, FXGame from Oanda read more

Wednesday, November 28, 2007

Combination of Technical Indicators

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Many traders say that simplicity is important, and using a single indicator is adequate as long as you are very good at it. It maybe true that simplicity is important but I don't believe that using one indicator for any trading is adequate, and in fact you can become potential victims of unreliability of that indicator.

Why multiple indicators can be more reliable than using a single indicator? In order to tackle this question, let us evaluate drawbacks of each indicator.

Moving average convergence divergence (MACD) is a lagging indicator which means that the movement of the indicator is always behind the current movement of the chart. Therefore traders who are heavily relying on MACD tend to wait longer time to find their setup position. Thus each moment of the day there are too many good opportunities are wasted because of the MACD move too slow than the current movement of the chart. In some cases Moving Average Convergence Divergence can also create certain degree of frustration for waiting the chart to move base on the indicator's guidance.

Relative Strength Index (RSI) is a leading indicator, which means that it predict the future ahead of the current movement of the chart. Despite of its credibility so called "leading indicator", the effectiveness of its application is not as good as MACD. And in fact RSI can bring more fatal mistakes than any of the lagging indicators. Let's take an example of each trading day, oversold and overbought positions are frequently happening and furthermore these conditions may be permanent and not coming back as expected. Therefore if you are heavily rely on RSI, then you are going to lose your money fast. This is because RSI signal the movement is too early, when the reality is the chart may not move back to its current position. Better to be lagging then leading it is less risky.

The Bollinger bands indictor work very similar to pivot point/Fibonacci retracement, where it predicts the boundary of fluctuation using the band. It consist of three bands which is the upper, middle (moving average), and the lower band. I am not going to explain further the application of it because I already did some of them in the past. Instead I am going to elaborate more of the potential drawbacks of the Bollinger bands. Even though the Bollinger bands can show where is the boundary of fluctuation, but the reality is, the chart frequently penetrated the bands boundary either temporary or permanently. Whatever the conditions are whether it is temporary or permanent, it will trigger certain doubts over your decision to make buy or sell. And when doubts start growing more and more, you will probably losing your guts and exit the market with at least certain amount of losses.

Now I am not going to explain all of the technical indicators because there are too many of them. Just to sum up everything, all technical indicators simply have their own drawbacks which can sometimes overwrite their advantages. So by combining technical indicators which has the ability to complement each other's advantage, is essential to reduce the gap of its drawbacks. An example is MACD can possibly combine with the Bollinger bands where the first will determine the direction of the trend and the second help you to determine the stopping point. Or maybe you can add up another indicator call slow stochastic in order to cope with the most current direction of the trade. Now with these three indicators you are solving your problems by moving in the right direction (MACD) with the most current (slow stochastic) movement and at the expected distance of stopping point (bollinger band).

Indicators Setting

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Indicators setting actually not as significant as understanding the behavior of its movement. This is simply because indicators are merely interpretation of price, which means it follows where ever the price goes to. However the behavior of the indicators moving within support and resistance level is very important. As the lower time frame for example 5 minutes and 15 minutes indicators most often providing tricky sign of direction, you will still be able to figure out the overall picture of the movement using support and resistance level.

There are three ways you can measure the support and resistance level which are the bollinger bands, fibonacci retracement, and pivot point measure. Since the forex market is very dynamic therefore i prefer to use the bollinger bands to measure support and resistance level. Fibonacci retracement and pivot point are as good too, the only different they are usually calculate fixed point of support and resistance.

Anyway if you really have no idea what setting you need for your indicators, maybe you can set them base on the following setting;

Slow Stochastic: 5-5-3
FastK Period : 5
SlowK Period : 5
SlowD Period : 3

Moving Average Convergence/Divergence (MACD): 12-26-9 (Default)
Fast EMA Period: 12
Slow EMA Period: 26
MACD SMA Period: 9

Bollinger Bands: 20-2
Moving Average Type: Exponential
Period : 20
Multiple : 2.0

Take note that on different chart platform there should be slight differences even though the indicators using the same setting. Therefore the most important is the understand the behavior of the indicators within support and resistance level which is more value able than the setting itself. And different setting require different mindset to look at it, so if you are frequently changing your setting without adjusting your mindset you are heading to absolute failure.