Pipsqueaks #17 – Part 1: Magical Indicators with Day Trading

My wife Elena is planning a trip to Seattle to visit a recently widowed friend; she speculated as to how our eight-year-old daughter would react to the news mommy being away for a few days – she thought that she would cry when she found out that mommy was going to be away from home. No, I told her, first she’ll demand to come along. Then she’ll cry. Of course, anticipating my daughter Lucy’s reactions to events is a piece of cake compared to forecasting price action in Forex. Over time and with lots of practice, forecasting Forex price action is a skill that can be acquired. Be willing to spend the time and some level of effort in studying the market and you too can read charts and trade with the best of them. And my chart of choice is the “naked chart”, that is, a chart completely (or almost completely) devoid of indicators.


I must confess I have a love-hate relationship with indicators. In the same way I can’t resist gimmicky gadgets, wondrous and magical indicators painting colorful symbols and lines on my charts always seem to capture my imagination. And let’s face it, some of them make for very pretty charts. But, at the end of the day, we are left facing the stark reality that, while indicators can be useful tools, many of them are little more than illustrations of what price did, but not actually what it is currently doing. Hence the term “lagging indicator” (also known as “momentum” indicators).


MACD is an example of a lagging indicator, which can often get you into trouble in a sideways market. Another group of indicators, called “leading indicators” (also known as oscillators), such as RSI work best when the market is not trending; and when it is trending, they tend to get pegged out on the buy or sell side until the market stops trending, however long that may be. They suggest an imminent price reversal which may not be imminent. Not wishing to throw out the baby with the bathwater, they do have their place and serve a useful purpose, but I’ve grown to the point where I prefer to forecast without them wherever possible.


Early on in my Forex adventure (and yes it is an adventure, for where else can you lose half of your assets while still retaining your spouse), I scoured the Internet high and low to find just that perfect indicator that would make my fortune (and look pretty too). After much time and many disappointing trades, I realized the hard way that there is no holy Grail of indicators. After a while, they all start to look the same. They will signal a trade well after a trend has started, and often when a pullback or a reversal is underway.


I remember encountering a strategy not too long ago whose creator christened “The Backward”, which was based upon an indicator that was so reliably bad that you could actually make more money trading against it than with it! I always get a kick out of indicators that contain the word “magic” in their name; “Forex price magic”, “master profit magic”, and so on. Almost as bad as the monikers given to many expert advisors in the same way.


Let’s see what we can do without indicators: look at the chart below.





This is a one hour chart of GBP/JPY. The period separators represent days of one week, and the shaded areas capture the entire range of each day. What trading opportunities do you see here? I left a 13 and 20 MA (as used in Foltron) as a reference.


I’ll be back next week with part two where I will divulge what I would do here. Take care!


Miss out on last week’s Pipsqueaks article?  CLICK HERE to access

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