Sunday, February 14, 2010

Indicators or No Indicators, What is Better ?

There have always been a discussion in forex trading regarding the use of technical indicators and the development of systems based with or without indicators. Many people consider the development of systems without indicators better than the developments of systems with indicators merely because of the fact that people are used to the fact that "indicators lag" and "indicators are not accurate". Today I wanted to dedicate a post to the analysis of this matter. Through the following paragraphs I will give you my opinion on the subject and why the use or lack of indicators in a trading systems has absolutely no importance.

So the question is simple. Is it better to have a system developed based on indicators or based on mere price action ? The fact that indicators are mere mathematical operations over price values speaks to the fact that you are always developing your system on price action even if you use or if you don't use indicators. I think that the main reason why people find both development styles different is because indicators have a reputation of being unreliable. However I think that the question is really : should you develop a system based on a sound understanding of price action ?
The answer is inarguably YES.

The problem with systems based on indicators is that people often develop these systems wihtout the slightest understandiong about what the indicators are telling them. They are simply ignorant about the underlying relationship between the indicator values displayed on their screen and price action. Of course, any system developed without a sound understanding of price action is bound to end up in failure so these systems people create from an attempt to automate indicator signals without ever understanding their meaning are simply doomed to fail.

This is the reason why people tend to favor systems which are developed simply based on price action, mainly because systems developed directly over price tend to have a more fundamental reason to work than systems which are merely attempts to automate an indicator's signal without the slighest knowledge about its true mathematical meaning.

The fact is that developing trading systems is not a matter of the tools used. It does not matter if you use direct price action or any set of indicators, the truth is that the only thing that matters is that the development of your system is based on a true and sound understanding or price action. Without this understanding of how price works and what the indicators you want to use are really telling you about price (what their mathematical definition and what their meaning really is) there is obviously not even the slimest chance to develop a profitable trading strategy.

There is no doubt that successful trading systems can be developed either way. Watukushay FE is based on the RSI indicator while Watukushay No.2 and Kutichiy are based on simple price action. All three systems are likely long term profitable and all of them have very different approaches to trading. The only thing that they have in common is that they were developed from a true analyis and understanding of the price action underneath.

If you would like to learn more about how these systems were developed and how you too can start developing your own long term profitable systems for forex trading please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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