Imagine for a moment our house has no foundations.We are a new trader, and like virtually every other trader we are approaching the market from a technical perspective, using the freely available indicators on our platform. Indicators such as simple moving averages, MACD, Gann, Fibonacci, and many more. We try them for a while, and perhaps even have some limited success, but then they start to fail us. We have no idea why.
Our approach is the same as before, and yet our trusty indicators are no longer working. Eventually we give up and move on, until we come across another indicator or indicator strategy, and start to apply this to our trading.This too works for a while, and we believe we have found the holy grail to trading success. But our joy is short lived. Once more our indicators fail us and we start to struggle.
We give up and move on, disillusioned but determined to find the answer. If all this sounds familiar to you, the first thing to say is, this is not your fault, because no one has ever explained the reasons why.There is nothing wrong with lagging or, as I call them secondary indicators. And I must stress that by secondary I do not mean second best. The problem is these secondary indicators work well under certain market conditions, and less well in others. In a trending market for example, a moving average crossover strategy will work well.
In a congestion phase of price action any crossover strategy will take you out of the market time and time again. This is why the patterns of success and failure are repeated. All of these indicators are based on historic data and attempt to forecast future price action based on history. Whilst a moving average crossover strategy will work well in a trend, a trend for most traders is not clearly identifiable until it is over.
It is very easy with hindsight to look at a chart and draw a trend line or consider two moving averages which confirm the trend.Other indicators work well in congestion phases when price action is trading in a narrow range. But at the time, does the trader have the tools and techniques to recognize when a market is about to trend, or is in a congestion phase? The answer is no, and perhaps to make things even more confusing the trader sometimes adds several other indicators which only deliver conflicting signals. For confirmation of this we don’t have to look very far.