A Profitable Technical Trading Indicator – Is There A Holy Grail?
So just quickly following up with a question from a subscriber, who’s asking whether there is such a thing as a profitable technical indicator.
So first of all, thanks for the question, now looking at the answer to this question, I’ll need to first clarify a few points, so profitability based on an indicator to, let’s say by itself generate profits, is going to be very unlikely, right?
So if you’re asking the question on whether there’s an indicator that you can simply follow and make money from it just by following its buy and sell signals, when it tells you to buy and sell, then the answer is most definitely no. That type of indicator doesn’t exist, and if it did exist it will certainly not be for sale, you know from a dodgy website charging just 99 bucks for it right, if we just think about it logically.
So asking whether there’s an indicator that is profitable, usually comes from a misinterpretation about what technical indicators are really there for.
So you see, technical indicators are simply a tool, or a range of tools, designed to help traders to find high probability entry and exit signals on their charts, and that’s really all. So they’re not designed for finding a correct trading direction and making profits automatically.
They’re simply there to help you find high probability places on the charts to look for entries, look for exits, look for stop loss placement, as well as profit targets, so they are never supposed to be used to tell you which instruments to trade, or which currency pairs to trade, and when to trade them. That should always be based on your fundamental analysis and the prevailing or the current market sentiment.
Now that will tell you which instruments you need to buy or sell, and will also show you when the best times are for you to trade them, for example, we don’t sell a currency pair because an indicator flashes red, we want to sell a currency pair because there are specific fundamental factors that are seeing one of the currencies strengthening and the other currency weakening at the same time.
So for example right, let’s say one central bank is planning to cut rates while another central bank is planning to hike rates, that would give you the fundamental direction you need to trade in, because you’re expecting one currency to be weaker and one to be stronger based on that interest rate expectation.
Then you can use this sentiment to basically find the time that you can trade it, so for example, there is an upcoming economic data point, that comes out with a very big deviation which basically solidifies the market’s expectations that the central bank, that is expected to cut will now cut rates at the next meeting, now you have the fundamentals as well as the short-term sentiment lined up, and that gives you the direction as well as now the time to trade that particular currency pair.
Now knowing exactly where to enter and where to exit, basically, where to place your stops and where to have your profit targets, that is where your technical indicators can be really useful.
They can basically then be used to find high probability entry and exit areas on the charts, in line with the correct direction that you’re already trading in. So for example, there are, how many trend indicators out there, and the majority of them will work rather well if you already know in which direction you should be trading right?
So in that sense, the question shouldn’t be whether there’s an indicator that is profitable, but rather can indicators help you to trade more profitably?
And to that question the answer would of course be yes, but only if you are using them in the way that you are, or that they were intended to be used, so that all means using your fundamentals and your sentiment to choose what to trade and when to trade it, and only using those technical indicators to help you with finding high probability entries and exit spots on the charts.
So, I hope that helps, any other questions of course please make sure to let us know.