General Principles of Technical FOREX Tools

As you select technical analysis tools, keep in mind:

What does an indicator really measure? Do you really need it in your toolbox, or can you glean the information from a chart? Consider Figure below. This shows prices depicted as a bar chart on the top and a relative strength (RS) indicator (see Technical Analysis) on the bottom. Functionally, relative strength measures the slope of a line (trend); it is a form of the slope-intercept formula you learned in algebra I: y = mx + b. Does the following relative strength indicator add anything that you cannot see on the bar chart? To some extent, it depends on what you want and need.

[caption id="attachment_13183" align="aligncenter" width="550"]Charts or Indicators? Charts or Indicators?[/caption]

Tip: To avoid offending RS aficionados, the author must mention that this indicator sometimes helps spot tops and bottoms when a new high (or low) in prices is not matched by a new high (or low) in the RS indicator.

It is quite often possible to eliminate indicators because you can more easily see the same information on a chart. This is the thesis of Charles Goodman's market environment (ME) charting technique. See Tools for Traders, for more on ME. There is a great deal of overlap in what the dozens of technical indicators measure. You can surely cover the bases with no more than three or four of them.

Tip: When studying a new indicator ask: "Is this good for trading markets or for trending markets?"
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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