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Wednesday, February 27, 2013

Forex Price Action vs Indicators. Which one is better?

It looks like every Forex website or forum I read lately there's always somebody, or more than one person praising "Price action trading" instead of using "indicators". It seems fashionable now, to say that trading pure "price action" methods will yield better results than using confusing indicators. And that the reason why you are losing money trading is obvious: you are using indicators! Stop using them!


Here's my opinion: "Price Action" and "Indicators" are the same thing. The exact same thing folks.

Proponents of "price action" say that you should remove all the indicators of your charts and look at trendlines, candle formations, support and resistance levels etc. But here is the thing: every one of those elements can be turned into an indicator! Every single one of them. An indicator can be developped to draw support and resistance trendlines and display alerts when they are violated. Indicators can be built to measure the strength of a pin bar formation, an engulfing pattern, three black crows, you name it. Anything that "price action" advocates defend can be turned into an indicator. And if indicators don't work, then "price action" doesn't either.

Indicators do show price action:

If your "price action" method has a rule that you need a close higher than every close in the previous 70 bars closes, guess what? That's a Donchian channel breakout.

If your "price action" mehtod is based on momentum and it measures the fact that the last bar is greater than x number of previous bars, or not simply greater, but greater by a certain order of magnitude, guess what? An indicator can be perfectly developped for that purpose.

If your price action method has some rule to measure a volatility breakout, you guessed it, a Bollinger Bands or a Keltner channel can answer that question as well.

If you simply want to say that the last bar close is lower than the close x bars ago. Well guess what? A moving average has the answer to that.

It is just common sense. How are indicators different from price action? They are the same frigging thing.

Then the other argument is "Indicators lag". Lag? What are you talking about? Indicators reflect data reflected up to the most recent known candle. Doesn't price action lag too?

If you want to enter a trend using "price action" you won't catch the first candles of that trend! Why? Because you are waiting for some sort of confirmation rule! It is the same thing, you are entering the trend late.

In the end folks, both price action and indicators try to predict future outcomes based on past history, the same past history. They are based on the same piece of information. So, based on that single fact alone they are no different and one doesn't have an edge over the other. In fact, they are the same thing.

The reason why Forex traders lose money (not only Forex traders) is not the indicators. It is under capitalization, incorrect money management, over leverage and psicology (not being able to sustain the heat in between a trend so as to ride it to the end), revenge trading etc.

The reason why indicators are blamed is:

1- Because as humans, we like to find answers to our failures and indicators are the first tool that new traders have contact with. So, they become the first culprits instantly. You can bet that if all the traders started their trading journeys based on candle formations and chart patterns, after a while they would say in chorus that price action doesn't work and indicators are the next big thing! Of course, the one they haven't tried yet.

2- Indicators are blamed because somebody wants to sell you a "price action" based system. So, attacking indicators and explaining they are the reason why you haven't had success just makes them look smarter.

I recently read two articles that really made me happy about this. At last! There's someone talking something that makes sense.

Indicators Vs Price Action: Is One Better Than the Other?

Destroying a Myth: Indicators Lag… Actually, they don’t.

In the end, what you really need is a system with a proven statistical edge and the efforts should be made to make sure the strategy is design based on solid principles and concepts.

I'll be talking about the few websites that have definitely changed my life when it comes to understanding forex, creating systems, measuring edges and achieve long term profitability. I believe there's just too much garbage out there, too many confusing sites and forums and people spreading useless information and myths. I don't claim to have all the answers. For sure I don't. But man, I hate misinformation and garbage as much as you do.

Cheers!
LT


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