Thinking of picking up trading these next few months, but I’m curious where profits come from.
Do any of the technical indicators have any real economic backing? For example, when the 20 MA trendline crosses the 50 MA trendline many people say it is a strong indicator for an upward movement. Is there any economic theory that explains why this is, or do people trade this way just because it works?
It’s likely because I’m new to this, but the whole thing just seems like a self-fulfiling prophecy of sorts where traders in their search for trends, end up creating the trend themselves. If I was an extremely successful trader and I publicly announce some BS indicator like (when the MACD crosses the majiggly=buy), will the markets actually adjust and make this true?
Hi Adam.
Suggest you spend some time at the free school on here.
Quick answers to your questions:
The indicators show historic data on what has happened, different interpretations on what these suggest for future movement can be taken of course but the general consensus is what most traders go with.
To a large degree they can be self fulfilling, if enough people subscribe at the same time, however there is no guarantee.
You must understand that Trend-lines signifies the flow of the economy. We are looking at the world financial activities and how the economy in a country or various countries moves. Each occurrence or activity affects the Lines you see on a chart. This is why, when a Trendline exhibits some sorts of behavior it is interpreted to mean something. All you have to do is learn what the interpretation are and use them to your own advantage.
That makes sense, but in the short-term surely these trend changes are pure speculation. If everyone’s interpretation of these behaviors are similar, (ie if I learn from Babypips School that when Indicator A crosses Indicator B = long), doesn’t that just make the entire thing self-fulfiling?
That’s what confuses me. If most people subscribe to the mainstream interpretation of signals, so that even if a trading strategy is blatantly BS if enough people do it it actually becomes true, how do people lose money then? For example, if the 20 MA crosses the 50 MA, you have 90% of the traders out there that learned from the same source that this is a long signal and so the trend ends up going long because of this - even if the fundamentals behind it are completely suggesting otherwise.
If what I am saying is true, then perhaps a much more rational strategy is to not analyze the trendlines themselves, but to analyze how people will respond to these trendlines.
Congratulations! You are asking the perfect question an FX newb should be asking. To answer your question: Technical indicators are complete and utter BS. A joke.
That is not to say you can’t make money using indicators, however, most people use them the wrong way. If you are taking a trade based on an MA crossover or MACD going up, you’re obviously a crap trader. But if you take the trade based on your analysis of the economy and then use the indicators as a confirmation, you may make some money (although I PERSONALLY would not do this because you would be leaving a lot of money on the table and hurting your win ratio and you’ll soon learn why). You see, indicators are lagging. That means they tell you the information AFTER the fact. In an economical sense, say we have a strong GDP print and the dollar rallies (shoots upward). The indicator will only show this after the dollar has rallied therefore after the move occurred. The ones who now enter based on their indicator signal are what we call part of the herd (price chasers). They are the ones buying when smart money is selling (to them btw) unless you got lucky and bought early enough, although your gains will be measly compared to the smart money.
Indicators can help show the trend of a strengthening economy if you trade long-term, but you’ll get in late. You may have gotten lucky using indicators the past year on a daily USD chart, but you still left tons of money on the table. However, the guys using fundamentals selling at the tops were making bank. And your indicator/s in current conditions is probably making you take unnecessary losses. You see, long-term price moves due to macroeconomic situations. Indicators will then show you AFTER the fact. You may get lucky and hop on the trend quick enough to make something out of it, however this will NEVER beat the guys at tops and bottoms (or near there) who performed there fundamental analysis/global macro analysis with due diligence. Look at any of the top traders in the field and you’ll notice they are all macro traders (Paul Tudor Jones, Soros, etc.). Not one will tell you to by EURUSD because of candlestick patterns or RSI (although some may use price action tools for entries, exits, that sort of stuff). Global macro generates flow, technical indicators do not. Follow the flow, and you’ll soon be making big bucks in the business. Or use the lagging indicators and be a part of the herd.
Short-term TA (not indicators though, just price action) does play a bigger role, however order flow is the biggest price mover when trading short-term (meaning whatever causes big orders to come into the market whether that is TA, FA, options, news, etc.)
[QUOTE=“ForexForte;699500”]Congratulations! You are asking the perfect question an FX newb should be asking. To answer your question: Technical indicators are complete and utter BS. A joke…[/QUOTE]
Quick note to add: Indicators are mathematically derived from following price. Almost all indicators are based on some sort of moving average and is how it spits out signals. That is why they lag, because they can only show signals after the price has moved. The only way they can move price on their own is if big participants entered orders based on them with less resistance on the other side, which btw just does not happen.
I think the joke here is your response in regards to indicators. Don’t get me wrong, I trade naked (at least for the most part) but there are plenty of successful traders who use indicators. Just because one can’t figure out how does not mean they are a joke. It all depends on the trader and strategy used. While you are correct that they are lagging and that fundamental data will move the price right away, but those who use indicators hardly rely on luck.
I think the biggest issue is that most can’t read/interpret them correctly and many newbies often have this approach that if an indicator reaches a certain level it is an automatic and guaranteed buy/sell signal.
In the end each traders needs to determine if they are a fundamental trader at heart or a technical trader. I trade naked and price action so to me fundamental data is the joke while for others it is a way to profit. There is enough room for all approaches and the ‘big bucks’ are made with different trading strategies.
[QUOTE=“TheLastBear;699823”] I think the joke here is your response in regards to indicators. Don’t get me wrong, I trade naked (at least for the most part) but there are plenty of successful traders who use indicators. Just because one can’t figure out how does not mean they are a joke. It all depends on the trader and strategy used. While you are correct that they are lagging and that fundamental data will move the price right away, but those who use indicators hardly rely on luck. I think the biggest issue is that most can’t read/interpret them correctly and many newbies often have this approach that if an indicator reaches a certain level it is an automatic and guaranteed buy/sell signal. In the end each traders needs to determine if they are a fundamental trader at heart or a technical trader. I trade naked and price action so to me fundamental data is the joke while for others it is a way to profit. There is enough room for all approaches and the ‘big bucks’ are made with different trading strategies.[/QUOTE]
Did you even bother to read my second paragraph, you know, the one that stated that, that is not to say you can’t make money with indicators, however, most people use them the wrong way? I’m going to go with no, because if you did, you wouldn’t of bothered with what we can now call a joke of a reply, seeing as how you basically stated the same thing I did.
Btw, you’re wrong. A trader doesn’t HAVE to determine if they are a technical trader or fundamental trader at heart because they can be both. I use both types of analysis combined with others every day and make good money doing so. But I rely on the traders who believe statistics will be on their side because it has been in the past, even though the past has no bearing outcome on the future (blind technicians). A gambler’s fallacy is you will. I also rely on traders who enter anywhere just because of news (blind fundies). That is not to say both can’t control their losses and be profitable, however I make my money on their losses.
Trading profits come from efficient risk mediation for global trade. Millions of cars drive on U.S. roads at predictable costs of accidents because of the efficiency of the insurance industry. This efficiency benefits the society with more auto transportation and some of that efficiency is kept by the industry in the form of profits. Traders provide a similar efficiency in risk mediation for global intercurrency trade. Parties taking on currency risk in the course of international trade can offset that risk with traders and pay only a small predictable premium while enabling profits for traders when their off-fx assets gain value and their hedges lose. Thus they, like auto owners transfer both some of the gains they make when things do not go bad for them with the risk of loss when things do go bad.
Here’s what I’d do (and did) just load up all the indicators that are talked about on the school. Start trading when the MACD crosses the majiggly(LOL’d so hard at that btw) and see what happens. Then what I found was a combination of the indicators which I use together. What I always refer to as my stars to my friends who stare at my pc when I’m trading like it’s hieroglyphs. If all, and I mean ALL of my stars align I’ll take the trade but only if it’s going in the direction of the long term trend. But being quite new at this I could very well be building a house of cards :18: so take caution when listening to me. But if you ask me it is in-fact a self fulfilling prophecy. If you sit back far enough you’ll start to realize you don’t need to master trading however you need to master human behavior
Using indicator is an art, there are many traders that use some set of particular indicators and they are earning quite well and regularly, but this kind of trading needs a lot of screen time. Its better that you should trade using some economic data and get candlestick patterns as your confirmation for entry.
