The Good, The Bad And The Ugly Of Financial Indicators

Indicators – Technical Vs. Fundamental

If you’re planning on short-term trading for quick profits, technical trading is not the way to go.

Technical analysis is the study of the history of price and volume movement over time, of securities such as futures, stocks, currencies, etc. The most common of them being Fibonacci, ADX, MACD, Stochastics, RSI and Bollinger Bands. Technical analysis is also a fad, marketed sublimely by the market makers. Any trader who relies solely on technical analysis is bound to fail for the simple reason – the forex market is not mechanical/technical. While past behaviour is a good predictor for future behaviour, it is just that – a prediction. In my experience I’ve found that a prime example for a trading career blunder, is to try to pinpoint exact entry and exit points using technical indicators. It doesn’t work that way. If it did, we would be millionaires.

Understanding The Forex Market

The forex market is made up of investors - buyers and sellers. Many of these investors perform market affecting trades unconsciously, e.g. exchanging currencies for a holiday or moving abroad, purchasing goods or online products from a different country, etc. And these investors are people, not machines! So how can one base trading decisions on a mechanical method of trading? The movement of the forex market is largely affected by the ‘big-boys’ of the financial world, which includes government central banks, billion-dollar corporations and the like. In turn, their decisions on where to invest their capital is based on current world affairs such as political standing and economic data such as interest rate differentials, CPI (Consumer Price Index), PPI (Production Price Index), IP (Industrial Production), etc. Which is where economic indicators play an important role.

Economic Indicators

After every major financial announcement, you might notice that the market experiences a brief period of high volatility. This has got nothing to do with Fibonacci, a mathematician (not day trader) who’s been dead for ages. Monitoring the financial news is your first step to bettering your trading system. Learn all you can about the macroeconomics side of things. The market never repeats itself in exactly he same way because the market is unique – investors/people are unique. But, monitoring current financial affairs can aid in capitalizing on certain certainties, such as human emotion. The ‘unconscious investor’ bases his decisions on emotion, the largest being fear. If the CEO of the Fed makes an announcement, investors listen with bated breath. Say its Bad news, investors then sell, and the result is an enormous immediate fluctuation on the market, which could well directly oppose everything that your technical indicators are telling you. This is the flaw in basing all your decisions on technical analysis.

The Victor

Fundamentals! While there are advantages to technical analysis, they have to be used in conjunction with a proper trading system and that system has to be created by an individual. Nobody can copy somebody else’s trading system and make it their own, simply because everyone is unique. Your trading reflects your personality (I will touch on this at a later date). The best traders in the world don’t rely solely on technical analysis, even the creators of these techniques. Go research them for yourself if you don’t believe me. So get financial newspaper and start reading!