Survival in any market depends on the correct decisions and understanding of the traders. All professional and non-professional traders try to understand all tactics of the trade. Some traders like old methods of naked forex trade or price action.
But most professional traders use indicators. But remember, all the indicators are not created equally. Not all of them are not worth using. The key is to use the indicators that mostly fit your system and satisfy your present need. However, some traders asked about the efficiency of indicators.
Do professional traders use indicators?
Yes, but indicators do not influence a professional trader’s trade setup. Most traders do not rely on a single indicator because it can mislead. These may be risky for their accounts. However, combining two or more may help them reach good decisions.
Here we discussed the limitations of some most popular and used indicators. This will define how some very popular indicators may misguide traders by their results. Wrong signal and complexity reduce the significance of many indicators.
What Indicators Do Institutional Trader
Do all traders use indicators? Do all the traders who use indicators are satisfied with their work? These questions are often in the minds of new and seasoned traders.
There are two types of indicators. These are leading and lagging indicators. That can be further categorized into four classes: trend, momentum, volatility, and volume.
Both leading and lagging indicators are used to measure performance and management.
1. Lagging indicator
Lagging indicators measure the performance outcomes. Data is collected after the performance and gives information on the result of the process. So, lagging indicators are based on past performance. It provides a rearview mirror perspective but does not show the whole picture.
As an active method, it concentrates on negative and unwanted results rather than positive inputs.
2. Leading indicators
Leading indicators provide signals to the trader before shifting into a new trend in the market takes place. They are meant to lead price movement allowing traders to catch trend reversals or new trends earlier.
The drawback of a leading indicator is that it is difficult to determine and measure. There is no guarantee of results. It only gives information that guides you to better decisions before the result.
Is It Possible To Trade Without Indicators
Trading without indicators is an old but very effective style. This style is called the Naked trade. Naked Forex is also known as price action trading. In this technique, trader decisions are based on market trends. It does not operate according to past and future market conditions, for this one should be perfect for reading charts and candlestick patterns.
This market runs on quick decisions. It is a good way to read the market without the distraction of multiple indicators and challenging strategies.
In the Forex community, many traders argued that it is closer to action because it relies entirely on live prices. Therefore they recommended beginners should learn naked forex without indicators first as it better understands the market environment than with indicators.
Professional trading Indicator
Many traders use different indicators that fit their trading styles. There are several hundred indicators present in the market. Some most common and widely used indicators are described here. We focus on their basic pattern and limitations.
1. Stochastic Indicators
This indicator of George Lane measures the relationship between an asset’s closing price and price range over a specified period. The stochastic oscillator indicator consists of two lines. The first line is the % K which compares the closing price with the most recent price range.
The second line is % D is the signal line that is smoothened of % K value while thought to be more important among the two.
It is usually used in markets where the prices swing regularly and therefore, it can produce false signals if the price is in a long-term trending position.
2. Moving average convergence divergence (MACD)
Money manager Gerald Apple develops this indicator. It is a trend-following momentum indicator that uses moving averages or exponential moving averages for calculation. The MACD is calculated as 12-day EMA minus 26-day EMA. These nine days EMA is called the signal line.
Like all other indicators, this also has some limitations:
- It can give a false reversal.
- MACD does not give an accurate analysis of trends many times. Trend-following signals fail or unimportant moves before a trend reversal.
3. Bollinger Bands
It was established in 1980 by Bollinger Band. It measures overbought or oversold conditions in the market. This is a lagging indicator.
The disadvantage of this indicator is that it is primarily reactive and can not be price-predictive. This deals with when the price moves upward or downward but does not forecast the price accurately.
4. Relative Strength Index (RSI)
RSI is a momentum indicator. It shows the rate at which prices are changing. When it is over 70, the asset is overbought. While under 30 means the asset is oversold. RSI is not 100% correct and sometimes gives false or misleading signals. Many traders use RSI with MACD because both are momentum indicators with different factors for precise signals.
5. Fibonacci Retracement
The Fibonacci Retracement level indicates where the price is supportive or resistive. But there is no assurance that the price will stop there.
Another big hurdle is that its results are too complex and difficult for most traders to understand easily.
6. Ichimoku Cloud
One of the limitations of Ichimoku Cloud is that it is based on past data. Past trends may not repeat in the future that’s the reason it gives false signals that are unexpected for traders. Japanese Goichi Hosoda developed it in 1969 and since then it is used to determine market trends.
7. Standard deviation
Standard deviation is used to measure price volatility by relating the price range to its moving average. The higher the standard deviation higher will be the risk for investment
The downside of this indicator is that it uses all past data and applies its formula. Skipping any information may decrease its accuracy.
Many traders believe that indicators can be very useful in providing them with important information about the market. Indicators can help traders identify changes in the market and make informed trading decisions. Some of the most commonly used indicators include moving averages, Bollinger Bands, and RSI.
While indicators are a valuable tool for professional traders, it is important to note that they should always be used in conjunction with other technical indicators and charting tools. By using all available resources, traders can improve their overall trading performance.