The problem with secondary indicators

I’m sure you recognize some of these indicators such as MACD, RSI, CCI and Stochastics. All very well known and yet here on six currencies pairs there is no agreement. Worse still every pair has a range of signals from buy to neutral to sell. Is it any wonder, as traders we end up confused and disillusioned, and constantly searching for an answer to the problem of wanting to know where a market is heading.

With no primary methodology in place to define the market conditions as they unfold, it is impossible to use secondary indicators with any degree of confidence. However, by using volume price analysis you will know when the market is in a congestion phase as it will be apparent from an analysis of the price action and associated volume. You will know when a market is trending because it will be clearly signaled and confirmed using VPA (Volume Price Analysis).

The VPA methodology is one based on using leading indicators, and in using this approach we are able to both interpret market conditions as they unfold, and as a result forecast future price behavior. This is the power of having volume price analysis as the foundation of your approach. Moreover, it also works on several different levels.First, it is the only way to forecast future price action with any degree of confidence as it uses two leading indicators – the only two we have as traders.

Second, it describes the market state in real time at the live edge, and in doing so the most appropriate secondary indicators can then be applied with confidence. In other words, in market conditions for which they were designed. Finally, volume price analysis works in all timeframes and in all markets.And this is probably the sole reason many traders ultimately fail. They do not have a primary methodology as their foundation.

Their house has no foundations. What they are trying to do is trade with secondary indicators in market conditions for which they were never developed. If the market is moving sideways, one group of indicators will work better than others. And conversely in a trending market a second group will come into play.Finally, at the top of our house we have our tertiary or third level indicators. Our proprietary indicators which you either buy or have built.

These are specialists indicators and fulfill precise requirements. For example, a currency strength indicator would be one here – essential in my view for trading forex markets.At the top of our house we have the roof. The over arching element which applies universally is time. Time is the key component of our binary option, but is also a key element in our trading approach. Time gives us our trading perspective, our horizon if you like.

Trading and using indicators in multiple timeframes is a further key element to which we apply volume price analysis.Volume price analysis is the foundation stone of my trading. I was lucky as my own introduction to trading began with volume and price trading index futures. Since then I have used it in every market and with every instrument. I hope you will to.

Therefore, let me begin and explain the essential principles of volume price analysis or VPA for short.Why Volume?To answer the question, let me start with some simple analogies, and perhaps the place to begin is by thinking what we mean by ‘volume’. Volume to me is the same as activity. Activity is represented by volume and volume by activity. When the sales begin after the Christmas holidays, there is a great deal of activity.

Shops are busy as eager shoppers rush to snap up bargains at a discount. This ‘buying activity’ would be represented both in terms of the sales revenue and profit for the day, but also in the number of transactions. Compare this perhaps to a quiet day in the middle of summer.Sales are likely to be low, coupled with a low number of transactions on the day. Volume then gives us our yardstick of activity.

In the context of a shop, volume is the number of transactions which we can compare one day against another. That volume of activity will be reflected in the sales figures for each of those days, which would tend to correlate relatively closely. In other words, on days when volumes were above average we would expect the sales figures to be above average too, and when volumes were low or below average, we would not be surprised to see our sales decline as well. Volume then is a very simple comparative tool.

It is one of the most basic yardsticks used throughout industry in terms of the volume of units sold. Think of volume in terms of a warehouse for a manufacturer or wholesaler.It describes in a simple, quick and visual way whether sales of a product are above average, below average or simply average. It tells us how many items have left the warehouse that day, week or month. If we divorce volume from price all it is telling us is precisely that, no more and no less.