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Traders utilizing technical analysis make it their business to devise structured trading methods known colloquially as “systems.” Traditionally, a system is composed of a signal and a filter. The signal can derive from a single indicator or from several working together, while the filter is generally a lone indicator. New traders can, however, run into trouble when they build their first systems. The problem, which is two-fold, stems from overcomplication. New traders often begin their journey lurking on Forex forums and utilizing free charting programs such as MetaTrader. While MetaTrader is a solid platform, the sheer number of free indicators available for it can overwhelm. Newcomers may find themselves fiddling with different indicators for months, switching from one to another whenever they make a series of bad trades. Worse, this bounty of indicators makes it easy to cram the MetaTrader window full of them on the erroneous assumption that “more is better.” As a result of this constant experimentation and over-stuffing, novice traders never learn the value of getting a proposed system down in writing and testing it exclusively for at least six months, which is the only way the trader can actually tell if they can utilize the system profitably. Worse still, these Forex hopefuls often don’t take the time to learn the difference between indicator types and will use them together indiscriminately. Consequently, many new traders use several indicators that essentially do the same thing. For instance, the Relative Strength Index and the Fast Stochastic are both oscillators with little lag. Having them on the same chart, if they’re both set to their standard periodicity, is a waste of space. Having too many indicators in a system causes two problems: information overload and false confidence. In the case of the first, the trader may panic if their indicators all indicate a trade and then several indicators later reverse the signal, as often happens. In such a case, the neophyte won’t know which indicator to defer to and will be exposed to the market all the while. False confidence manifests when a sophisticated-looking system is actually a hodge-podge of disparate indicators that were never meant to work together. A good example would be a system that includes both Bollinger Bands and the Market Facilitation Index. Bollinger Bands is a channel indicator that represents changes in volatility, while the Market Facilitation Index uses bars of various colors in a separate window to illustrate the real-time flow of volume. Trading with both indicators can be confusing because they are analyzing the currency pair in very different ways. Forex newcomers that build complex systems are loath to discard or simplify them because such systems provide a sense of sophistication. However, the effectiveness of their systems are always directly proportionate to their Forex knowledge, and therein lies the problem. Fortunately, new traders can overcome the debilitating tendency to overcomplicate by learning about the different types of indicators and as a rule using only one type each in their system. In general, there are five types of indicators: trend spotting such as the simple moving average, trend strength such as the MACD and PSAR, channels such as the Bollinger Bands, volume such as the Market Facilitation Index and price action indicators such as the Renko, Kinji and candlestick formations. Core Liquidity Markets is an Australian company which is registered with ASIC, ACN 164 994 049. www.clmforex.com
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