Forex Indicators - Mistakes That Will Make You Broke

You know, there’s a lot of back and forth quarrel going on between traders who want to trade as simple as possible, with almost naked charts (no indicators on them) and traders who see technical indicators as a welcomed help. Personally, I believe that you should go for whatever works for you: if you make money trading naked charts – good for you. If you make money trading with indicators – why change? However, when using indicators you have to pay attention to a few things that could get you broke, so in this article we are going to focus on some indicator flaws.

 

Why Indicators Could Get You Broke?

Buying indicators from Get-Rich-Quick Gurus.

I am sure you’ve landed at least once on a cheesy sales page where some unknown market wizard swears his indicator will make you rich and urges you to buy it. Do yourself a favor and don’t reach for your wallet, no matter how good it sounds. Usually these indicators are just a renamed version of freely available indicators; they make small changes, add some arrow to make it newbie friendly and Presto! they have a money making machine which they are willing to sell for 47.99 bucks… more like a going broke machine if you ask me, so stay away.

 

Be Aware Of the Type of Indicator You Are Using.

This is a must! It’s like knowing what type of car you’re driving. I am sure you would drive differently an 80 BHP car than one with 300 BHP. It’s the same with indicators… well, they don’t have engines and wheels but some are faster than the others. The faster ones are called leading indicators and the slower ones are called lagging. We have an article that covers with more detail the differences between the two types of indicators, but I will describe them in a few words here, just in case you don’t feel like reading an entire article: leading indicators give a signal before price actually starts to move in that direction. Think about the indicators that show overbought and oversold: once they enter that area, price might to reverse. Emphasis on “might” because we don’t know for sure, it’s just an early hint. Oscillators such as Stochastic and Relative Strength Index (RSI) are considered leading indicators. The lagging ones are moving averages and indicators derived from them, such as MACD (Moving Average Convergence Divergence). These indicators usually give a signal after a new trend has established; they are slower but give less false signals than oscillators (leading indicators).

 

Using Repainting Indicators.

This type of indicators is very tricky because they plain and simple lie: when you open a chart and look back on it to check for trade signals, you will see that almost all of them are profitable. But before you think about giving your boss the finger, you must know that in real time these indicators give a signal and if price moves the opposite way, that signal will magically disappear and then reappear in a more appropriate location. Eventually price will change direction and the indicator will not change that signal anymore. Basically if the signal is profitable it stays on your chart and if it’s not, it will disappear so looking back on a chart, you will only see the “good” signals. If you have already entered a trade in real time but the indicator removes the signal and price doesn’t move your way – assuming you don’t have a time machine – you will lose money so I’d recommend against using such type of indicators. One way to see if an indicator repaints is to watch it on a 1 minute chart. When it generates a signal, put a horizontal line there and see what happens if price doesn’t move in the direction pointed by the indicator. If the signal disappears and reappears later, in another location, it’s clear that you are dealing with a repainting indicator.

 

Having Indicators On Your Charts But Not Listening To What They Tell You.

I wasn’t planning on writing about this, but it happened to me while writing this article so I figured it should be in it. Here’s the short story: I was looking for a long on Cable but one of my oscillators showed overbought. Of course, according to my rules, I don’t buy in overbought but… eh, for some reason I bought the pound. It didn’t go even 1 pip in my favor and instead it reversed, going straight to my stop loss. I guess this is one type of mistake that will get you broke. Don’t do it… duh I should have known better. Why keep indicators on your charts if you are not gonna use them?

 

Having Too Many Indicators On Your Charts.

The more indicators you have, the harder it will be to get them all to agree and generate a good signal. One could give you a long signal, another will tell you to sell and another could be flat. Also, when you have too many, you might be tempted to overlook some of them (yea, like I did) but ultimately if you have too many (according to some people) and still make money, don’t change anything. After all, our goal is to make money with Forex, not to set up our charts how others want us to. Often people say things like “Oh man, you have so many indicators on your chart that you cannot even see price”. Well, if your chart looks like that but you are happy with your results, then you shouldn’t change your style just to make some other guy happy.

 

The Lesson To Be Learned

The mistakes above are just a few of those that could get you broke. I’m not trying to mess with your mood, I am just being a realist – forex is hard as you probably know already so you have to find what works for you. Not for me, not for anybody else. Find the best way for you to deal with indicators and avoid the mistakes I wrote about. But heck, if you make money constantly using a repainting indicator, don’t change that just to make me happy 😉