The other day I received the following question from a trader named Paul.
I have inherited an illness (SCA1) and now work from home, as I can be at my computer for the majority of the day I tend to short-term trade.
I only trade one currency (Euro/USD), and look to pick up just 10 pips on each trade. I use two moving averages and the MACD indicator for my trading. My moving averages are set to 10 and 5 and I only enter a trade when the two moving averages have crossed over and are pointing in the direction of the trade and the MACD is confirming both the direction and strength of the trade. This system seems to be working really well and I am picking up between two and three trades per day.
My question is:
In your opinion are they the best indicators for this type of trading?
Thanks very much for your excellent service and continual support. It is experienced traders like you that give me the confidence and desire to become a successful trader!
This falls into the arena of the “What inidicator is best?” category. My answer to that has always been and will always be that there is no such best indicator. Whatever suits you best is the one you should use.
In this case, my comment on Paul’s selection of indicators is that he’s using a set of indicators which are basically all based on the same thing. MACD is a moving average based indicator, so Paul is basically using three MA based signals. As such, he’s not really providing himself with any extra information.
My second point is that generally speaking moving average based indicators are aimed at use in identifying trending markets, which means users of them should probably take a trend trading view. That means one need to be prepared for periods of frequent whipsaws when the markets aren’t trending. It also means that the vast majority of gains are made from relatively few trades, by letting a position run. If you close out trades at a specific target you lose any chance you might have for the large gains which are the ones which produce the returns.
If one wants to trade for quick, small gains it might be better to use an approach which is more range/retacement based than trend based.
Now, having said all this, testing is the important thing. No matter what indicator you wish to use you should thoroughly backtest it to guage performance and to intimately understand how it works.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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