Price action vs indicators

I have been studying Forex day trading via books, online resources (including this site) and videos. I recently started the tutorials on this site and see that indicators are suggested.

In my search for knowledge, I ommonly find “experts” who discourage use of indicators, noting that knowledge of price action can tell you everything that the indicators do. I have used a few indicators MACD and RSI, but did not find them terribly useful.

Does one really need to use indicators / is it possible to learn the price action equivalent?

I don’t think this is an “either/or” type issue. The aim is to apply some kind of tool components that will help one to estimate what the underlying price movement is doing right now, compared with before, in order to estimate what might be coming next.

The skill is not so much finding the most sophisticated components, whether they are indicators or PA tools, but in why they are selected, what they are intended to show and- most importantly- how the trader is able to interpret what they are actually telling them.

I think in many cases it is only a question of personal preference as to which types of analytical tools one is comfortable with and which interpret price movements in the most effective way.

By way of example here are two views of the same recent hourly chart for USDCHF.

One has some PA type S/R lines that show reversals of levels and finally a breakthough with retest and follow-through

The second has multiple MA’s and RSI

Both methods show successful signals…and actually even more successful when combined! :).

I agree with Manxx about this, and always find his charts interesting.

I know a few very successful traders who use indicators as a “bias”, to decide whether or not there’s a trend in their time-frame and look for potential long or short entries accordingly, but always identify the entries themselves by price action.

The people I know using indicators successfully are all relying on some knowledge of price action as well.

I think Manxx is, too.

I believe that people relying on indicators only, with no real understanding of price action, have a real mountain to climb (and not only during uptrends, ho ho).

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Here we have two comments from two different posters, both confirming the same core issue in this question of PA v. Indicators. It is not a question of which is best, rather it is simply whether a trader really understands what the various components are supposed to show and why - and therefore what it is suggesting might be happening right now. All these components, whether they belong to the PA camp or the indicator arsenal, are designed to identify significance in current price movements relative to earlier movements.

There is perhaps a strong human psychological aspect present here. Humans are generally a group species that naturally want to belong to a certain crowd and form a natural loyalty to that particular crowd. In fact, most of us can identify membership of many different groups ranging from our nationality to our favourite sports teams.

In fact, we could compare this PA v. indicators issue with a football match. If we support team A which is playing team B, we will automatically wish the best for all our team A players regardless of their relative individual skill and ability compared with their respective opposing player in Team B! Even if the team B goalkeeper is much better than our own team A goalkeeper we will still hope that our team A goalkeeper will perform better. It would be very difficult to support individual players from both sides in the same match!

And we tend to do the same with PA v. indicators. For example, PA supporters will dismiss indicators as “lagging” per se, whereas PA components are also a comparative study of current and previous price levels, albeit in a different manner.

Perhaps one of the biggest drawbacks of modern platforms is the ease in which one can load indicators, draw lines, auto-identify patterns, etc. It means we can instantaneously load a Stochastics or an Ichimoku indicator and start “trading” it without the slightest idea of how it is calculated, why and what it can show and what can go wrong. This is readily and regularly transparent in various posts on BP, where the only question asked is often “what settings do you use” rather than why do you use it, under what circumstances does its construction perform most reliably, and when does it tend to throw out fake signals, etc.

PA is to me, “better” mainly for the reason that one has to do at least some kind of personal analysis when setting up lines, patterns, etc. And even candle characteristics need a touch of personal recognition and identification. Whereas indicators, especially those thousands of downloadable MT4 custom-made signal generators, require no brain power whatsoever. These, together with the eternal search for EA’s and robots to do our thinking for us, tend to encourage us to leave our brain in the drawer or appeal to our desire to be able to sunbathe on the beach while the system does the rest.

Like any craftsman or professional, you pick your tools individually and with care, and you practice with them and develop your skills in using them until you can achieve your own excellence.

I seem, for PA trader moving average is the most relevant trading indicator! Yes, Price Action is my main strength of Forex trading. The main advantage of using moving average is, it describes dynamic support and resistant levels so smartly. You can try this.

Whilst my own trading is based almost entirely on MA-based structures, I cannot agree with this statement.

Maybe I am just “splitting hairs” here, but I really cannot see how moving averages act as “support” and “resistance”. There is absolutely no fundamental reason why prices would bounce off a particular MA value. One only has to think of how many different types of MA formulas there are, how many different periods are used in them and how many different chart timeframes they are applied to and you can imagine that there is an MA value for every single pip that the price passes through - so which pip is the MA support/resistance.

Having said that, I agree that MAs can provide some kind of indication of where are good levels to enter a trade or re-renter on a pull-back, but the reason for this is more related to technical self-fulfillment where a certain value and type of MA is widely monitored and acted on. For example, it is widely held that a 200 SMV is a key MA on daily charts monitored by institutional investors. If that is so, then indeed one could anticipate a reaction around that level as we approach and /or pass through it.

In a way, this is purely an exercise in best-fitting a line to a particular slice of chart price movements. It is not S/R in the true sense of where value is being found.

An MA is really all about indicating whether the average price level over a given number of periods has changed when compared with the same average calculated for a similar window of periods that occured earlier. And if it has changed, then one has to decide is that change significant or not.

And if the change progresses in the same direction over a successive number of windows of periods then we are defining a trend, and the steepness of the line demonstrating this change in average prices, also indicates the rate of change - or strength of that trend.

It is worth remembering that we calculate an average value, but we place the value at the end of the period on the current candle or bar. Therefore even current price relative to that average can be of some significance.

So it is not the value of any particular MA that is actually driving the price (except to the extent of self-fulfilling technical recognition clusters), rather the MA is simply indicating whether the current position and activity of the price is significant relative to where it has been earlier.

I don’t understand why so many people believe this.

It isn’t true.

Price, not moving averages, demonstrates levels of support and resistance.

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I like price action method.
At the same time use the indicators MACD, 50 MA and 200 MA for filtering transactions on a trend. It’s quite convenient for me.

Maybe you tried with default sittings that’s way, no good result! Actually, default sittings are for the general traders! You have to research on it by using several parameters! I use RSI since my 1st day of trading, it provides me good info about technical market.

Thanks for all of the input, varied as it may be! I am a noob trying to shorten my learning curve, so if I can get by on PA without learning various indicators for getting started, I am inclined to do so.

Well, I don’t use any indicator so blindly! For me, market context first then indicator! In addition, I am use to with my trading process! By the way, Price Action is my main strength of trading.

The truth is, what you need to learn is how to read the charts, memorise the price action signals, because remember every single candlestick is a clue, hence memorising these patterns is very crucial. Only Price Action Can Do This!!

the next part being fundamental analysis, understanding what they mean and being able to interpret them, for example what happens when interest rates increase, or when retail sales decrease etc… and being able to understand how the economy is within that country, that way you’ll be a step ahead of the banks and government.

For example, we can see in the USA that retail sales have decreased, people are spending less, which means people are saving their money up. That’s going to force the banks to increase interest rates, so it decreases borrowing, and increases investments, with higher interest rates people are more willing to invest their money because they’ll have a higher ROI (Return of investment) which leads to a stronger currency, because that creates new businesses, which leads to new jobs being made, which leads to a higher GDP. This is just an example of what i’m predicting to happen in the USA, most likely interest rates will change in December.

Anything else such Macros, MA’s is just an add-on bonus confluence, just like how you’d stack a brick with cement to make it stronger, you’ll stack your price action with indicators to just make your analysis more stronger.