Reader Questions Answered Trading Tips

On Technical Indicators and Trading Methods

Indicators are always a favor subject among traders, especially new ones still trying to find their niche in the market. Here’s a set of questions related to that theme from a member of my mailing list.

1) I find Elliot Wave Principle quite hard to use as I am often guessing where to start, and I also find it hard to identify exactly which waves should be in the pattern I am trying to identify. Do you think it is a useful tool that, if used correctly, can give good indications about where a market will go more than 50% of the time?

I actually addressed this question (which comes up surprisingly often) in the post Trading with Elliott Wave, does it work? The quick answer is that while I can write a bit about it myself as needed, it’s not something I would ever use in my trading, but I do know some folks who swear by it.

2) People often critisize indicators such as MACD, moving averages and Bollinger bands as they are lagged, and I’ve read that people use different indicators based on what they find most useful. If any of these indicators are helpful, why don’t people try and use every indicator possible and when a large number of these agree THEN make a decision about the trade. Do people do this? If not, why not?

Some people definitely do use an array of indicators for confirmation. Mostly, however, I’ve found that someone watching at a bunch of different indicators is looking for something they will never find – surety that the trade will work out. Oftentimes they end up using a bunch of indicators which all have the same basis, meaning they present the same basic information to the trader.

My personal suggestion to traders is that they find a relatively small number of tools which make sense to them – they understand how and why the indicators do what they do. Once that’s done, it becomes a question of developing experience in their usage.

3) In your opinion, can somebody consistently be right more than 50% of the time using technical analysis? Is it, in your eyes, ‘voodo science’?

New traders get WAY too hung up with being right. I will not be the first to ask the question “Would you rather be right or make money?” If the answer is the former (and you may not know it consciously), then you aren’t going to do well in trading. A good book to read on the subject is Trend Following by Michael Covel. The focus of trend trading is to not worry at all about right/wrong, but rather to be in a position to benefit when the market does something meaningful. Not all strategies follow along that path, but it is nevertheless true that successful trading does not require a win rate above 50%.

As for “voodoo science’, I think the fact that I consider myself mainly a technical analyst will answer the question.

4) What should I do, aside from reading ebooks and articles and advice, to make me more proficient in trading forex? Will simple practice help develop my intuition about what the market will do?

Practice, practice, practice. Books and such can take you a long way, but they cannot take you all the way. That can only come from experience.