The Top 3 Misconceptions in Adopting FX Technical Indicators

The extreme popularity in the subject of ‘Technical Indicators’ accompanied by the latest marketing tactics has pushed them to gradually flood the markets, driving an increased number of dissatisfied traders and major disappointment.

The purpose of this article is to go over the top 3 most popular and applied indicators in the Forex market today.

1.          Moving Averages (MA)

Despite their popularity in online forums, Moving Averages’ effectiveness to indicate price action accurately remains questionable at this point. Therefore, they are still considered a “lagging” indicator, which draws the trend based on the previous information, meaning that certain occurrences and complexities, i.e. geopolitical risks, terrorist attacks and similar, can NOT be taken into account.

2.          Relative Strength Index (RSI)

As a rule of thumb, the RSI is classified as an Oscillator since it is most often used to search for divergences on the markets. When attempting to identify “divergence” as telltale sign of momentum waning, one should be very careful because the RSI does not automatically mean new momentum moving in the opposite direction. According to the book  New Concepts in Technical Trading Systems by  J. Welles Wilder “the Index will usually top out or bottom out before the actual market top or bottom, giving an indication that a reversal or at least a significant reaction is imminent.”

3.          MACD

The original purpose for creating MACD was to signify changes in a trend’s direction, momentum, strength and duration, primarily in stock’s price. However, when dealing with Forex, the largest financial market in the world, the initial functionality may require some adjustment and, what is more, may not be driving the same results compared to the ones a stock trader would get utilizing it. The other issue lies in the traders’ lack of knowledge on the difference between a Ranging and a Trending market.

Conclusion

Performing technical analysis is one the most established trading concepts, which has become far more progressive with the release of the latest trading tools, including intelligent and more user-friendly technical indicators. Despite the arrival of a colossal stream of new indicators annually, the basic assumption of technical analysis continues to remain intact and is comprised of the following:

– the market discounts everything;

– prices of financial instruments always move in trend;

– the history tends to repeat itself;