By James Woolley – One of the first things people learn about when they enter the world of forex trading is technical analysis. The reason why is because by using specific technical indicators you can create your own profitable trading system and use these indicators to find lots of high probability set-ups.
I should start by explaining what technical indicators are first of all. Quite simply they are basically just mathematical calculations based usually on price and/or volume. The calculations are derived from the past behaviour of a currency pair and are used to predict the future price movements of this pair.
The key word is ‘predict’ because they are not foolproof by any means. They are only there to provide you with guidance. However when you combine a few of these indicators you will find that when they all indicate that either an upward or downward movement is most likely to occur in the near future, you get plenty of high probability set-ups where the odds are in your favour.
It’s up to you to decide which indicators you wish to use, but it’s important that you don’t go overboard and use too many. If you do, you will simply end up getting lots of conflicting trading signals, and therefore very few opportunities to place a trade with any confidence.
The best strategy is to test out different indicators on your chosen time frame and choose a few which seem to offer the best results. They should hopefully produce the same signals at approximately the same time and help provide you with more than enough high probability set-ups.
Indeed once you have produced some kind of trading system that incorporates a few of these technical indicators, your subsequent success or failure is then often determined by how well you manage your money. In an ideal world you want to cut your losing trades early using a strict stop loss and let your winning trades run for as long as you can.
I personally like to close half the position for around 40 or 50 points, and then let the second half of the position run for as long as possible. If you move your stop loss to break-even after you close the first half of the position, you’re essentially creating a free trade for yourself, which is a great position to be in.
Anyway the point is that technical indicators can be an invaluable tool for any forex trader. They are not 100% accurate at predicting future price movements, but when a few of them are used in conjunction with each other, they can provide lots of decent trading opportunities where the odds of success are firmly in your favour.
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