Do Indicators Really Work?

My goal throughout this blog is to share with you the tid bits of information that might not be so obvious when starting out. In this particular post I want to talk about technical indicators and how they should and should not be used in your trading.

If you are the kind of trader who feels most comfortable building your own trading system, then all the more power to you. It is the path most professionals take! It makes it all the more crucial that you listen carefully to the advice in this post because you will very likely consider indicators at some point along the way to buliding your system.

As I'm assuming you are already aware, you have many variations of technical indicators. Moving averages, stochastics, MACD are some of the more popular ones, but there are dozens more.

The most important thing i can tell you is to keep your charts CLEAN. New traders have this false sense of security thinking that they improve their ability to predict price moves by packing the charts with 10 different indicators.

There is a psychological rationale that explains why us feeble humans think this way but i'll touch on that in another post. For now just take my word for it and resist the temptation to complicate things. It will only hurt your progress.

Having too many indicators on a chart serves only to confuse you because they often give off conflicting signals. In other words, one might be screaming buy, another might be screaming to sell and yet others will tell you to sit tight! How does a trader handle that much conflicting info?

The simple answer is that they can't. The trader will eventually suffer from a common trading syndrome known as Paralysis-By-Analysis: You are analyzing too many different factors and eventually find yourself acting on none of it. So strip your charts clean with the exception of maybe one or two indicators at most and build from there.

So, we've established that using too many indicators is almost always counter-productive but there is actually another reason so many traders fail with them. The indicators they do use are used entirely the wrong way!

In my next post i'll elaborate with some specific trading set-ups that make use of indicators that i've had some good success with. I'll explain which indicators those are and how you might consider using them to help your trading.

Stay tuned!

The Difference Between a Good System and The Right System

A good system is one thing: a system that has a high profit expectancy.

The right system is two things: a system that has a high profit expectancy AND a system that YOU can trade with consistency and discipline with minimal error.

Before i go any further into different styles and methods of trading, i wanted to take a step back and re-emphasize what i've been mentioning periodocally throughout the blog: YOU MUST FIND A METHOD OF TRADING THAT SUITS YOU AND YOUR UNIQUE PERSONALITY.

You might be asking how that's done or even why you should bother but let me assure you that even though you might not see it now, it will be well worth your time.

Before you ever place your first trade or build or buy your first system you have to do some soul searching. It's important to take a look at yourself and determine what you expect to get out of trading. Determining your objectives is such an important part of learning to trade yet so few take it seriously enough. The answers will ultimately serve as your guide to your perfect system.

Let's take a look at some things you should be finding answers to:

• How much time do you have to dedicate to trading each day?
• How much time will you dedicate to training, which can include personal psychological work, developing systems, reading, etc.
• What are some of your personal strengths and weaknesses? Are you patient? Do you consider yourself the introverted or extroverted type? Are you typically a disciplined person? Do you panic easily?
• Do you have personal conflicts (could be work, could be family or anything else that can arouse emotions with the potential to interfere with trading)?
• How much money do you have to dedicate to trading?
• How much are you willing to lose? How much drawdown are you willing to endure?
• Are you trading to earn a living or build wealth over time? If trading for a living, how much do you need to make in a year to live off?
• What are your return expectations?
• What kind of market conditions would you feel most at ease trading? High or low volatility currency pairs, pairs than tend to trend, range, a bit of both?
• How do you view money management? How will you manage your risk?
• How will you enter trades? Purely technical reasons or fundamental reasons? Combination?
• How exit methodology do you feel is best for you? Trailing stops? hard stops? Technical stops? Do you see yourself going for smaller, more frequent profits or trading less frequently but going for much bigger profits?

I can continue to go on but i think you get the main idea. For a more detailed explanation of this idea, i strongly recommend you read Van Tharp's Trade Your Way To Financial Freedom.

Write down your answers and let them lead you to a system or style of trade that feels right to you and fits your current lifestyle. Too many try to fit the system rather than letting the system fit them. Once all the building blocks are in place trading should be effortless because it's right for you. If it's not right for you then trust me when i tell you that you will eventually find a way to sabotage yourself that will show up in many different forms:

1. It might show up in the form of a lack of discipline, not following your plan
2. It might show up as you quickly losing confidence in a system when it starts losing
3. It might show up as a feeling of boredom, feeling the need to find something more exciting.

You see bad trading is not necessarily the result of a lack of discipline but rather not having the right system to trade with in the first place. Brett Steenbarger in his excellent book Enhancing Trader Performance, mentions that lapses in discipline are often subconcious attempts at moving away from something that doesn't fit to something that does.

So spend some time self-assessing and thinking about your objectives before placing your hard-earned money on the line...you will thank yourself later on.

Forex Signal Providers & Automated Forex Trading

In some previous posts, i was mentioning that one of the most effective ways to trade is by getting a solid grasp on Support and Resistance and Candlestick Analysis. Nothing has changed and i still believe that with 100% conviction. But not all traders are built the same and therefore what i consider to be the best may turn out to be the worst thing for another.

Having said that i would be doing the readers of this blog a serious disservice by not expanding my discussion to other types of trading - which brings me to the topic of this post: Signal Providers and Automated Trading

The fact of the matter is that S&R and Candlestick analysis take time to learn. They probably take more practice than any other style of trading out there. All the literature you get your hands on will tell you that trading has to be kept objective, but trading these methods is considered, by some, to be very subjective and time consuming to back test.

Many traders feel much more at ease with a method that is 100% mechanical, void of any judgement and subjective interpretation. This style of trading is very practical to program and quickly backtest because trading rules are extremely precise. It is, to this group of traders, the best way to remove emotional interference from the trading equation. These arguements are the primary reasons we see automated trading growing in popularity so quickly.

Signal Providers are now, more than ever, providing complete automated solutions to traders. Essentially, they provide you with buy and sell recommendations and automate the execution of the trades for you on your brokerage platform with the ability to override trades if you so choose.

I wrote an article outlining several things to watch out for when choosing providers and under what cicumstances traders can use them successfully because let's face it - there are many scams out there. I won't rehash it here so feel free to read it here if you haven't already. http://www.goarticles.com/cgi-bin/showa.cgi?C=1107835

What i want you to take away from that article is the importance of managing your expectations and CONSERVATIVELY testing everything out for yourself. Question everything and never take anything for granted and you will come out so far ahead of other traders who don't bother. Every action you take should ensure you are protecting yourself.

If you read my article and are 100% serious about my guidelines, then you're ready to give the Automated Forex Trading System by PROSIGNAL a look. I have personally used these guys when i started trading about 6 years ago and they are still around today. They have evolved into something quite impressive as far as automated trading goes.

The way thier automated service works is this: Have a look at the performance data of the 200+ signal providers Prosignal has partnered with and decide which combination of strategies appeal to you the most. You then create a portfolio of providers that PROSIGNAL will trade for you through your brokerage platform.

Why i like PROSIGNAL in particular?

• Creating a portfolio of so many providers allows you to effectively diversify risk
  
• You have the flexibility to trade strategies from only 1 provider to as many as 100.
  
• Loads of statistical data provided to help you decide which providers are best
  
• PROSIGNAL provides plenty of sensible guidance to help you create your ideal portfolio (In my opinion, use a portfolio of providers that offer a profit factor of 1.5 or higher, at least 100 trades on record and a tolerable drawdown relative to total profit)
  
• Performance history also includes live trading results
  
• PROSIGNAL takes education seriously. They have a complete educational package to help get you up to speed on FOREX basics, risk management and trader psychology.
  
• They have phenomenal customer support
  
• Low cost trades.
  

WORD OF CAUTION:
It is very easy to look at the performance pages and get excited. Stay calm and objective and realize that what and how you trade will be dictated by a conservative risk management plan and how capitalized you are. You may or may not duplicate posted results.

In my experience, the posted results are legitimate, Prosignal is legitimate, and you can make money with them. But as with any style of trading, proceeding conservatively and patiently and protecting your downside risk is the only way to go, especially in the beginning. What i like most about Prosignal is that they are very open with this notion. Just decide upfront whether trading a black-box system fits with you. If it does, i truly believe there is no better choice than PROSIGNAL.