Longwood Currency Trading





Current Picture Hi, I'm Peter Rose, Founder of Longwood Currency Trading, and welcome to LCT Blog Post 04/16/20 — The Myth of Using FOREX Currency Trading Indicators.

Trading indicators are things like RSI, Fib levels, MACAD, etc. Trading resources focus on them as guides as to what price may do next, with heavy emphasis on the 'may'.

I qualify that 'may' because all indicators — all — represent what price has done in the past. No 'indicator' can predict future price movement.

An astute trader can use some of the available indicators to create a probabilistic assumption of what price may do, but that's all it is: a probabilistic calculation.

That being the case, from a scientific standpoint — from someone who has a B.S. in Physics and a lot of mathematics — the reality is that you can not predict through probabilistic calculations what a specific element will or could do, but rather only the probability of what the entire system of those elements might do.

In addition: probabilistic calculations against market data are not the same as making those same types of calculations, for example, against the movement of particulate in a fluid, called Brownian Motion. This is the biggest issue with market 'indicator' use.

You simply can't make the assumptions that non-scientists who trade, or want to trade, make as to how these calculations against indicators are made or used. That's the biggest issue, and one that is not discussed anywhere because the topic really is so complex that without years of mind squeezing mathematics it would be just incomprehensible gibberish.

But there is another, equally compelling reason not to use indicators. The following are a couple of sections taken from an online advanced trading training course I'm currently developing.


A short discussion concerning indicators
Look… trading is simple.

Books, and videos only give you information, but information alone is not enough. And some of that information is actually detrimental to your success. You really need a mentor to guide you.

For example, look at all of the trading indicators and systems — the information — that’s being taught.

There are dozens and dozens of indicators you can put on your chart. You would think then that the more indicators you use, you’d have more information to make good trading decisions.

That couldn’t be further from the truth.

If that's supposed to be useful, then why is it — with all of this information — that a major retail broker’s analysis of 43 million client transactions showed that 90% of traders lost 90% of their money in 90 days? Why is that?

There is a branch of statistical mathematics called permutations and combinations. It deals with the different ways that you can order a bunch of objects.

For example, if you have 2 objects, A and B, there are 4 permutations possible: there’s A or B or AB or BA.

What this means then is that by using just 5 indicators — like a moving average, Stochastics, RSI, whatever — that there are 325 possible permutations those 5 indicators could be applied in.

That's too much information, and you just can’t trade that way, as evidenced by the 90% who fail quickly based on being taught all of that information.

For a comprehensive analysis of technical indicators and why they are not valid as predictive tools, read, Technical Analysis And The Active Trader, by Gary Norden. Norden spent 15 years as a bank trader in London and never knew anyone who used such things until he began to trade his own account. Stunned, he spent 2 years researching the subject, chronicling his findings in his book.

I use a simple process that consists of just a few basic rules, with each having just 1 of 2 possible options to choose from.

That makes trading simple. Trading is simple as long as you’ve got someone to guide you.


So... just how do you trade?
Almost any book on beginning trading goes into the basics of what you need to know to trade. It's a pretty simple process in itself:
Outline of Trading
  • Identify a trade opportunity.
  • Determine the viability of the trade.
  • Place the trade through the trading platform.
  • Manage the trade.
  • Close the trade.

Sounds simple enough.... But, therein lies the problem: it is simple. The reason that's a problem is because most folks only look at the resolutions to them as "what" to do, and "when" to do it.

For example, an approach to identifying a trade opportunity in a USD quote currency (such as GBP/USD) might be to look at price dropping down through some support boundary on news of a U.S. Fed rate increase. Both of those conditions are indicators of price erosion (price should continue to decline) for that pair, right? But what more often than not happens is that price flips around, and spikes significantly upward.

Why would that happen? It might at first glance appear that you made some bad judgment as to interpretation of what you see going on with price action on the chart, or that there must be other news trumping the Fed rate hike.

Unfortunately, FOREX educational resources — whether that be books, videos, or courses — can only generalize broad "rules" that address a large student base of varying knowledge and experience. It is classic regression to the mean — training developed for the mean. However, the statistics show that this type of education fails because 90% of the traders who study it fail.

Having said that, I want to make sure you understand that I'm not implying that FOREX education resources are bad or deceptive. They are not. They provide, for the most part, good, solid information. It's just that the information is cast so that it is easily consumable by the most number of people. So, it isn't that the education is bad, it's just that it is lacking in focus on the underlying principles that information is based upon.

In the price movement scenario I just mentioned, for example, the facts that price dropped below support, and the Fed raised interest rates is just the information. But that really doesn't give you anything to trade on.

Of more importance to just information is: Why was that support trend line drawn where it was, and how significant a line is it, and what time frame was it drawn on, and why did the Fed raise rates, and what and when was the Feds last actions, and what are the current economic and political climates in the two pair countries? I could go on. Endlessly, actually.

And that's why I wrote this course the way I did. It's geared for the person who already knows the basics of trading, and has experienced just such a scenario with trades as in the example I just gave.

It's only someone who has burnt their hand grabbing the handle of a hot cast iron skillet who is not only open to learning what not to do, but who also has the mindset to actually make changes counter to what they thought was correct based on gaining an understanding of why something happened as opposed to just what happened based on some indicator 'signal'.


Thanks for taking your time to read this post,
peter


Of further interest might be the following featured on my YouTube channel for Longwood Currency Trading:


Video: Problems With Using Technical Analysis in FOREX Trading



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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Longwood Currency Trading is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of the Longwood Currency Trading are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.