Just before I start this post I’d like to firstly add that I’m not having a go at any trading method here, I’m only asking a question, hopefully to get a few opinions.
Recently I’ve been reading a book called - Forex Patterns and Probabilities by Ed Ponsi. I’m halfway through the book and so far Mr Ponsi has imparted two, quite basic trading strategies to his audience. One of which involves the “proper order” of some moving averages, (EMA’s).
Now the proper order looks like this:
As you can see there is a 10, 20, 50, 125 and 200 period EMA. (Ed Ponsi doesn’t have a 125 EMA in his book, I just added it in to give me a halfway point between the 50 and the 200). In an uptrend, as pictured, the 10 would be above the 20, 20 above the 50, 50 above the 200. The reverse would be true for a downtrend.
His strategy involves favourable price action, confirmed by the proper order of the moving averages, further confirmed by RSI, which helps you trade only in the direction of the trend, ie if they all point up, don’t take shorts, if they all point down, don’t go long.
This after a while, threw up a question to me. For quite some time now, the most favoured “technique” of trading on the forum has been price action trading. No indicators, lines, bells, whistles or dancing girls, just clean bare charts. There are those that promote it, those that trade it and those that trade it successfully.
We’re all reminded that ALL indicators lag price, and the ONLY indicator that truly reflects price is price itself. Hard to argue with that really. Newbies are regularly told, “If you want to see what price is doing, look at price.” And I think they probably do. But does that really help them?
For isn’t it true, that for years and years, some very, VERY successful traders have used a myriad of indicators to help them accumulate fabulous wealth? In fact, isn’t it true that some of those very successful traders actually INVENTED some of the more popular indicators.
Bollinger Bands, Elliot waves, Fibonacci, Gartley patterns all named after the inventors and traded successfully by some to this very day.
Ichimoku, Moving averages and MACD, all used successfully by traders every trading day of the year.
Chris Capre (not having a go Chris, just using you as an example, apologies if I offend in any way) has a thread on this site called Understanding Price Action. The very first chart posted on that thread has a 20 EMA on it. Isn’t that an indicator?
Isn’t the ability to trade PURE price action a skill learned by many hours of chart watching?
Let me put it like this, if I was to give you two tips for two separate horse races, which one would you be more likely to take?
The first tip would be, in the 3.30 race there are 5 runners. If I was you I’d bet my money on horse number 1, called Bullet, 'cos he looks great.
The second tip would be, in the 3.50 race there are 5 runners, If I was you I’d bet my money on horse number 1, called Rocket, 'cos horse two only has 3 legs, horse 3 is blind, horse 4 is Asthmatic and horse 5 is 357 years old.
Which tip would you be more likely to take??
Having said all of that, it is important for new traders, or any trader in fact, to guard against “overkill” or overloading your charts with so many indicators that your chart begins to look like a Jackson Pollok.
I’ve always liked Pivot Points on my chart, in analyzing the EU pair previously I have found the % of price moving beyond a certain level and sometimes use this in my decisions.
I’ve recently put Ed Ponsi’s noted EMA’s on my charts, which may make me miss out on opportunities, but helps me trade with the trend. In fact, the only trade I lost this week was this morning’s GBP/NZD which traded against the direction of the EMA’s on the daily chart.
Now before I go any further, I’m NOT saying trading Price Action alone doesn’t work, for I know there are people who do trade it alone and trade it well. All I’m saying is, I think it may actually be a harder skill to learn than the use of a few good, properly understood and used indicators.
Obviously taking the time to properly understand the use and limitations of any indicator, and adding them 1 at a time, only AFTER you know how to use them, is of paramount importance. And I don’t advocate making a decision based on any 1 indicator alone.
Surely price action is the first indicator that a possible set up is, or is about to, unfold. You wouldn’t take a trade by looking only at the MACD, but to me there are a load of different strategies, methods and combinations that are being used everyday, to achieve the same result.
More than 1 way to skin a cat I believe the expression is. All you have to do is find a combination that stacks the odds in your favour, one that works again and again given a confluence of the signals they provide and then have the confidence to trade it when that confluence appears.
Easy then eh?
LOL well maybe not easy, but by no means impossible or, for that matter, improbable.
