[B]Written by Thomas Long, FX Power Course Instructor[/B]
One of the more important points we try to stress to new traders in one of FXCM’s Power Courses is to look for confirmation of a signal to enter into a trade. This is especially true for technical indicators which can generate many false signals on their own. The problem is that most of the time new traders will use one technical indicator to confirm the signal generated by a different technical indicator. But most indicators are really just fancy moving averages and they have a tendency tell us the same thing in a different way. Here is a daily chart of the EUR/JPY. The daily trend is up, so we are only looking to buy on a pullback. On the pullback, we can use a technical indicator to help us time our entry into the trade. The first indicator on the chart is the MACD (Moving Average Convergence/Divergence), followed by the RSI (Relative Strength Index) and finally the Slow Stochastics. We can see that the RSI signaled to enter after having moved to above from below the value of 30. Next, the Slow Stochastics gave the entry on a crossover after having been below 20. Then finally the MACD gave the entry signal on the crossover. Since they are all based on moving averages, they all gave a signal to buy, but the timing is different. The RSI is usually first, but can sometimes not move to extreme levels to signal an entry so you might miss some trades. The Slow Stochastics will give you more entries than the RSI which may mean more losing trades. Then the MACD will usually give the signal last which means not as good of an entry as the other two indicators. These are just three of the more popular indicators but there are many to choose from. But the point is that you only need one or two to help time your entry. Plotting up to 10 indicators to search for that “perfect” entry will usually cause more confusion than certainty. So my recommendation is to pick just one or two that you find easy to use. Being able to identify the signal to enter as it is forming is what trading is all about, so keep it simple and consistent to achieve those results you are looking for.
