Are Technical Indicators a waste of time for your trading?

Technical indicators are useless if you don’t understand them.

Let me give you an example of an indicator that I don’t even use that often.

Here we have a simple strategy with the Stochastic oscillator. Buy in oversold area and sell in overbought area, probably the most popular strategy with indicators in Forex Trading.

In green, you can see the winning positions. In red, you can see the losing positions.

Super cool, right? Let’s use the Stochastic Oscillator and make money in the Forex market!

“Oh my god! As soon as I started to adopt the Stochastic oscillator, I lost all my money! This indicator doesn’t work at all!”

It’s not the indicator, it’s you.

SV = (C-L) / (H-L) * 100

Where:

SV = Stochastic Value (K%)
C = Current Close
L = Lowest low
H = Highest high

If we analyze the formula, you can see that the Stochastic oscillator compares the current price to a range of prices that we can select in the settings (usually 14 periods).

When we have a strong trend, an uptrend for example, with the increment of the current price, the range also tends to go up, so the value of the stochastic doesn’t increase much or, in some situations, it also decreases while the price is going up.

It is clear that this indicator is not the best one to use during trending markets, at least not with this setup, while it is a powerful tool to trade ranges.

Is it that the indicator doesn’t work? No, it is that you don’t know how to use it properly. And it is likely that it is like this for all the other indicators that you have tried to use so far.

I don’t blame you or other traders. I have taken many courses (free and paid), bought many books and spoke to many instructors and traders. 90% of times you hear the usual:

• Buy in oversold area and sell in overbought area;
• Buy when the 20 EMA is crossing the 100 EMA from below and sell when the 20 EMA is crossing the 100 EMA from above;
• Buy on the breakout of the upper part of the Bollinger Bands;
• Sell on bearish divergences;

No, no and NO!

Can you imagine a doctor that goes like: “stomach pain? Take this medicine”, “rash on your skin? Take this cream” and so on like this, without even visiting his patients?

It’s not so easy. If it was, I could teach this to my nephew, who is 6 and he could buy in oversold areas and become a millionaire by the age of 7.
You need to understand what the indicator is telling you.

You need to understand that market situations might be different and you can’t always apply a couple of rules to generate signals and make money.

You don’t necessarily need to use indicators to make money in the Forex market. You can use price action, you can use an algorithm, you can study market microstructure or something else, but if you study indicators in the right way, I’m sure you will see good results even with them.