Forex technical strategies are based on mathematical theories to create technical indicators, but do these indicators work?
Technical indicators assume that market movement can be predicted if you know the right equation. The one constant the indicators can’t account for is how we react to sudden market moves or news, thus disrupting any theory we are applying to our trading.
Many Forex systems are based on a technical indicator to predict prices in advance. Indicators such as Fibonacci, Gann, and Elliott Wave are commonly used, but you should use them with caution. You should adjust your indicator or automated system to reflect current market conditions because most of those indicators work under the assumption that a set equation works all the time and not just some of the time.
We all know that no theory will ever work all the time. If they did, there would be no market. The reality is that, regardless of the mathematical theory we use, statistically, 90% to 95% of us will fail.
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What do we do next?
Since we already established that Forex markets moves are not solely based on theories and certainties, the logical deduction is that the market moves are based on odds and probabilities. When you trade based on probabilities, you shift the odds to your favor. This shift will lead you to profits.
Although I truly dislike the comparison of a professional trader to a gambler, there is a similarity that can’t be avoided. Gamblers keep things simple by taking small losses while waiting for a high odds setup that translates to a big win. In that aspect, Forex trading is not much different, by keeping things simple and minimizing your losses, your successful trades translate to big profits.
To be a successful trader, you should be aware of the market sentiment and use technical indicators to help you corroborate the price direction thus increasing your odds of a successful trade. Case in point, for many years, we have seen unbelievable advances in mathematics, forecasting, computers, and new investment theories. Still, the ratio of successful traders to those that fail remains the same. To succeed, you must account for market sentiment as it relates to the news and human nature reaction to sharp movements in price.
By following this simple, yet often overlooked principle, you will greatly increase the odds of becoming a successful trader to your favor.
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