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Surprisingly, all the indicators used to gauge FOREX trading are effectively the same, despite whether investors are using a Moving Average, MACD or RSI. When traders incorporate indicators into their strategies, the methods they use to interpret their meaning make all the difference.

Types of Indicators

In essence, there are two types of indicators that traders use to trend market activity – Oscillators and Moving Averages. MACD and RSI are considered Oscillators and are mathematically bounded over a relevant range, such as one to 100.

Oscillators are mostly used by retail investors to determine whether a trend has started or stopped. However, the difference between MAs and Oscillators tends to be nominal, making it difficult for traders to use indicators to make money.

Problems with Trending

When investors use indicators to identify trends, they can perform their analyses using any one of a number of metrics. This makes it challenging to discern which indicators to use relative to investors’ information needs and strategies.

As soon as trends start, they often head in a different direction only after a few bars, making most indicators highly volatile tools to trade with. Although banks and brokerages encourage the use of standard indicators, there are inherent problems associated with them.

Turtle Soup

Savvy investors know how to leverage indicators to their advantage. For instance, when Turtle Traders were heavy in the market, all the brokers knew that they would enter the market when the price was at its highest high in 55 days.

Knowing this, Paul Tutor-Jones developed a system to trade the exact opposite and take out all these retail traders. He made in excess of $1 billion with the method called Turtle Soup, which shows how insight into market indicators can net investors handsome returns.

Using Indicators the Right Way

Brokers teach indicators because they know that if traders use them, over the long-run investors will lose money. Consequently, correlation and the history of the volatility are better indications of the ideal market entry and exit points.

Investors stand a better chance of making money by accepting risk and correctly position sizing within that risk as opposed to looking at indicators that tend to say the same thing. Also, investors need to look for indicators that say one thing while the market does another. In this way, they can get ahead of the rest of the market.

Many of the world’s top traders use the simplest indicators imaginable to trade millions of dollars and make greater than 20 % pa. Which makes you think, why am I trying to make 100% per month… Maybe I’m risking too much and maybe my broker is hoping that I attempt this knowing that I will lose.

Food for thought.