One of the reasons why forex traders often fail to make profits in the market is their reliance on only certain technical indicators and ignoring the market forces. What new traders should realize is that the currencies market is determined by the fundamental law of supply and demand.
Simply focusing on technical indicators while ignoring the market force of supply/demand will hurt your profit margin. What you must understand is that the figures and numbers that appear in indicators and oscillators like Stochastics and MACD are based on data that have already passed.
Whether it is a 20, 30 or 200 day Moving Average, the action taken by the average trader is to buy or sell a currency as soon as the line crosses up or down the bars. The truth is that the ideal moment has already passed, because, as stated, the data in the chart has passed already.
The key element you should include in your forex strategy is to look at a chart and go over the support (demand) and resistance (supply) areas. By evaluating these areas, the forex trader can determine, in spite of what the Moving Average might say, whether there are more buyers or sellers at any given point.
It should be emphasized therefore, that in your forex strategy, the proper time to buy is when the currency is far below the supply point. The closer your purchase is to the supply stage, the lower your profits will be. If your forex strategy relies solely on the Moving Average, you will end up buying near the resistance point.
This shows an example of how using the market forces and technical indicators in your forex strategy can bring you profits. Another frequent mistake of traders is relying on only one or two forex technical indicators.
For instance, the MACD (Moving Average Convergence Divergence) is used to calculate the differential between two Moving Average periods. When the MACD crosses up or down the price bars, it is taken to mean there is a change in trend, meaning it can be time to buy or sell.
The problem here is that utilities like MACD and RSI can give false sell signals, especially in a prolonged trend. A MACD will often suggest to the trader to sell when the forex appears overbought or oversold. However, overbought/sold tendencies often appear in long trends, but which do not mean the trend is expiring.
The way to use MACD is with another technical indicator like the DMI. By using the ADX scale of the DMI, you will see that overbought and over sold leanings in a trend are not indicative of a trend change, but that the momentum will continue. Using these two in concjution you will know when to buy or sell.
The means for an ideal forex strategy is knowledge. It is not enough to know how technical indicators operate; it is important to recognize what tools to use and when. By combining them in accordance with the movement of the currencies market, you have a winning forex strategy.