News Column

Price action versus indicator trading: All you need to know

July 8, 2014


THE EVOLUTION of charts and intuitive technical indicators have, to an extent, made trading the FX markets easier. Technical analysis is the study of past price movement to predict future directions. And within technical analysis, two of the key premises are that prices are a comprehensive reflection of all market forces and prices are repetitive.

There are several different schools of technical traders, of which price action traders and indicator traders are just two. Price action traders, or naked traders, study the price movement of the security based on the premises stated earlier, in addition to fusing technical analysis to catch potential opportunities. They recognise that the trend may be your friend, but also understand how to identify the uptrend/downtrend. There are benefits to this, with the most important potentially being early entries and exits.

Traders who employ indicators rely on signals before entering or exiting. Lagging indicators such as the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and moving averages are perfect examples. These indicators tend to provide late entries and exits into trades, but they are great at confirming the direction of the trend. The major disadvantage of late entries is, of course, potential losses.

These indicators are derived from price itself, so what a price action trader may have seen earlier, the indicator only confirms. Most successful traders use both price action trading and technical indicators to attain optimum entries and exits.

For more information about price action and an array of indicators to use in the FX market visit www.dailyfx.comLukman Otunuga is a junior market analyst at FXCM.

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Source: City A.M. (UK)

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