Trading with Indicators vs. Price Action Trading
Finding or creating the best trading method is an extremely personal process. There isn’t really any one method which is “better” than another necessarily. There are methods which don’t work at all of course, but among those which do, there is no “holy grail.” What you do have to choose from is a vast range of fundamental and technical analysis based systems, and two types of systems you’ll hear about on regular basis are trading with indicators or price action trading.
Trading with indicators means overlaying technical indicators on your charts which you then use as a basis for trading decisions. These indicators are mathematically calculated (not by you), and consist of leading and lagging indicators. A leading indicator signals you before the start of a potential trend, and a lagging indicator notifies you after a trend has (probably) started. Leading indicators are more likely to fake you out, but also more likely to get you in a trend early. Various indicators you can use to trade include oscillators, Bollinger bands, MACD, Parabolic SAR, Stochastics, moving averages, and more—the list goes on and on. Along with the well known technical indicators, there are also indicators developed by modern traders for use with specific systems. Most indicator systems involve waiting for two or three indicators to align and signal a possible trade entry, which you then take at your discretion.
Price action trading doesn’t require the use of indicators at all, though many people use some moving averages as guidelines for support and resistance (which can indicate typical entry and exit points). Price action involves looking for specific patterns to form in the bars. Some common price action formations include triangular consolidation, head and shoulders, and inside bars. It is extremely important to understand that it isn’t just the pattern itself that matters. Where you see the pattern form is critical. The context can be everything. Price action is wonderfully simple, but it still takes a ton of practice and a deeper understanding to use it effectively.
The drawbacks and benefits of each of these trading methods is for you to discover with practice, because you cannot consider a trading method as distinct from yourself. You may think this is an objective issue, but it’s not. One system may work fantastic for someone else and work terribly for you, and another system could work horribly for someone else and work amazingly for you. Whatever method you do decide to go with, be prepared to make modifications to it as you go. You will probably end up personalizing your techniques as you get more experienced. You may even end up designing a completely new trading method.
When choosing a trading method, what is most important is your personality. Do you feel more comfortable with several indicators on your chart, or none at all? Many people have succeeded with technical systems and price action trading. Many more people have failed with both. The variable is you. You are the most important part of your trading method, and this is entirely a matter of personal taste, practice, and skill.
One thing to consider either after you’ve picked a method and are looking for a Forex broker (or before you pick a method, if other matters have narrowed down your choice of broker already) is whether the broker’s platform can support your trading method. Recommended Forex brokers will have platforms which can display your indicators clearly. Most brokers include a certain number of technical indicators to begin with, and many brokers let you load in indicators of your own. You also probably want to consider downloading some sophisticated charting software (there are great free and paid varieties). Many Forex traders use external charting software to find their setups and a broker’s platform to place their trades.