Because we have reviewed the basic geometry of prices and know how to create a forex map of price action, a next step in shaping a trade is to diagnose what the prices are exhibiting in terms of strength and weakness. There are dozens of indicators that accompany many of the forex platforms. This multitude of indicators can lead to confusion
for the new trader. Many of these indicators are not all useful for forex trading. Many of the indicators offered by forex platforms reproduce indicators that have been a standard part of the trader tool box for generations in other markets. Whichever indicators are used, they should be evaluated as to how well they contribute to identifying market conditions and help determine the best location and time to put on the trade.
A first step in choosing indicators to use in trading is to understand what they do.
Technical indicators are algorithms, which are equations that take price data and generate a smoothing out of the data. The value to the trader of any indicator occurs when they help confirm several technical conditions, as shown in the checklist below:
How strong is the trend?
How strong is support and resistance?
Are there signs of weakness in the trend or in support and resistance?
Are there signs of volatility or momentum peaks or exhaustion?
Is there a divergence between the indicator and prices?
The overall goal is to find the set of indicators that increase the level of confidence that the opportunity to put on the trade is at hand. It’s useful to think of indicators as ingredients in a recipe to create the basis of a trade. However, the trader needs to also recognize that the key disadvantage of indicators relates to their inherent lagging behind the market and their potential instability when applied to very short time frames, such as under five minutes.
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