In today's blog, we will go over why most forex indicators are useless. We will touch on the subject of how the majority of indicators are lagging, how indicators push new retail traders to take positions trading reversals, and how having a bunch of indicators on your chart takes away from your ability to focus on what's really important.
The majority of indicators lag.
The majority of indicators lag. What does that statement even mean? Well by definition the term lag means to fall behind in movement, progress, or development; not keep pace with another or others. So to put that into context with trading, the majority of indicators are slightly behind the raw price action and data presented on your chart through your candle sticks. This is because indicators are comprised of the very same data that is being shown via price action except that data has gone through a mathematical equation in order to be interpreted in a different form. Because of this process the entry or reversal signals presented by indicators, usually oscillators are delayed and have already been established and begun happening via price action. So now that you know this, it begs the question, why even use the indicator when you can just read the price action as it happens in real-time?
Indicators push retail traders to trade reversals.
Have you ever heard someone say the phrase "I bought the dip, but the dip kept dipping"? This usually happens when someone tries to predict a reversal before it actually happens. Now you might think to yourself who would do something like that, if the market is actively trending down why would someone place a trade in the opposite direction? I'll tell you who, people that use indicators. Indicators such as RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), Stochastics, and everything else in between try to show you high and low points where price is likely to reverse because it is "overbought", or "oversold". What most likely happened is a new trader is on the charts looking for a trade, and he slaps on the RSI & MACD indicators. He can clearly see that price has been going up that day and the indicators are telling him that price is in the overbought zone. Because of this, he trusts the indicators and places a sell order expecting price to reverse to the downside. A new candle prints and starts to print downward by 5-10 pips, the new trader sees this happening and gets all excited thinking he found the holy grail and can already see the dollar signs and fancy cars in his future. Then suddenly price stops going downward, and a new candle opens and completely engulfs the red candle to the upside continuing the already established upwards trend and causing the trader to lose his trade.
Indicators crowd visual chart space.
Indicators look fancy with all the lines and colors, and when you stack a handful of them together on some big screens it can give off the impression that you are a super smart pro trader to someone who doesn't trade and doesn't know anything about trading. The reality of it is that having a bunch of indicators clogging up your chart space just takes your focus away from what really matters which is what price action is actively doing. New traders tend to like stacking indicators because they think if they can analyze as much information as they can it will give them an edge. What usually ends up happening is just the opposite, the new trader has 20 different indicators and 20 lines plotted all over the place not knowing what end is up looking in 20 different directions thinking they are Megamind and they forget what really matters is the direction of the trend and what fundamentals were driving it. Having all these unnecessary indicators telling you different things about where the market will go can cause analysis paralysis confusing the trader, making them indecisive in their analysis and unable to accurately predict the market and what type of trade they should take. Also having all those extra indicators just makes it look like you took a bunch of spaghetti and chucked it at your monitor.
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