Forex trading strategy

3 reasons why using trading indicators wrongly will lose money


3 reasons why this is a 100% lose money Forex Trading Strategy for Swing Traders


Misconception of Trading Indicators

One must understand that Trading requires lots of EFFORT to understand the market and discipline to enable to follow through your trading plan. Many people fail to understand that they can’t simply replace trading techniques and market knowledge with the use of Trading Indicators.

These are the top 3 common mistakes that most individuals do; regardless of the products they trade (this includes the Forex, Stocks, Futures, and Commodities etc).

  1. Do not understand the characteristic of these indicators & how they work
  2. Blindly follow other users and misapprehend the concept of the indicator’s application
  3. Cross up buy & cross up sell. Simply put, NO trading plan

Let’s put the commonly used indicators using GBPNZD chart as an example.

The commonly used indictors are:

  1. Bollinger Band
  2. Stochastic Oscillator
  3. MACD – Moving Average Convergence Divergence

Bollinger Band

One common mistake that most Traders do is using the Bollinger Band as a price indication for ‘Overbought’ and/or ‘Oversold’ region, especially when price goes sideway.

Correct application of Bollinger Bands:

  • When price is seen breaking out of the overbought-oversold bands, it is an indication that the current momentum/trend is very strong. Take the GBPNZD chart for example, price was seen trading and hovering outside the upper overbought band, therefore traders should go long in the lower timeframe.
  • However when price moves back inside the band, it means that the momentum of the uptrend is slowing down. Thus the upper overbought band can be used as a signal to square off your long position, and NOT used as a sell signal unless this is supported by other technical inputs to go short.

Stochastic Oscillator

The Stochastic Oscillator has a fixed range of 0-100, this indicator too is often used for the wrong purposes such as ‘Overbought=Sell’ and ‘Oversold=Buy’. Again, it shares the same misconception with Bollinger Bands when Traders used it to gauge the ‘Overbought’ & ‘Oversold’ region.

1. How to interpret of Stochastic Oscillators:

  • When the Stochastic indicator is in the top 80-100, it indicates that price is hovering near to its upper percentile and vice-versa when the Stochastic indicator is at the bottom 0-20 region.
  • Indeed when price is in a sideway range, the Stochastic Oscillator can be interpret as ‘Overbought’ or ‘Oversold’ signal which can be helpful in trading. However the Stochastic Signal can hovers persistently around the top 80-100 region in a very strong uptrend.

2. Right application of Stochastic Signal:

  • The right way of using the indicator is to look out for the ‘pop’ signal, below GBPNZD chart is an example of what traders should look out for in a trending situation.
  • The ‘pop’ signal is when the oscillator touches or falls below briefly the top 80 – 100 region then notch up again as seen in the GBPNZD example. Traders can consider going long when such ‘pop’ signal occurs in a very strong uptrend and users who do not know may be tricked into shorting instead.
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MACD – Moving Average Convergence Divergence

The MACD consists of a set of blue (MACD) and red (MACD-signal) lines that crosses up and down distinctly. Most traders use it as a signal to ‘cross up buy’ and ‘cross down sell’ and such trading style will produce a 50-50 outcome because in a lengthy timeline, the distribution of cross up and cross down signals are 50-50.

Correct application of MACD:

  • MACD is an exceptionally effective indicator for beautiful trends due to its zero-axis. It provides a very good filter for Traders such that when the MACD > 0 = price is uptrend, and when the MACD is < 0 = price is downtrend.
  • With this knowledge, you will get more desirable results as compared to 50-50 results by using ‘cross up = buy’ and ‘cross down – sell’ signals and for profit taking.

Indicators do not guarantee a perfect Trading Plan

A profitable Forex Trader do not heavily rely on Indicators to form his/her strategy. One should focus on having a trading plan that fits trading indicators and price action. In Online Forex Master, we teach our students the complete strategy of Tflow® method to ensure that all of our students are guided in the right direction.

We are not implying that it is entirely wrong to use the indicators, but it should only be used when necessary because if trading the overbought-oversold or cross up-cross down were so easy, then why are people still looking for the Forex Holy Grail?


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