In our LIVE webinars each day, traders often ask how much attention should be paid to an indicator…any indicator.
It’s a great question since many traders, especially newer traders, literally become fixated on the indicator at the expense of everything else. When the indicator gives a buy signal they buy and when it gives a sell signal they sell…regardless of what is happening on the price chart.
Always remember that price action, the direction that the pair is moving, is our primary indicator…Indicator #1.
So, first and foremost, we need to determine the trend on the pair, the direction that the market is moving the pair.
Take a look at the Daily chart of the CADCHF below…
We can see that the pair is in a downtrend on the chart so we know that we ONLY want to find reasons to sell the pair. Knowing that and using the Slow Stochastics indicator on the chart, we will only take selling signals and ignore the signals which tell us to buy the pair. Each of the signals in the black circles would be the selling signals and a short position could have been taken successfully on each one.
The buy signals in the red boxes are to be ignored in a downtrend.
Keep in mind that a trader can still have a losing trade even when taking a higher probability entry. However, your likelihood of having a successful trade will be enhanced (not guaranteed) by entering trades in the direction of the trend.
Remember, the indicator has no concept of trend, it only reflects momentum. As traders, it is up to us to determine the trend and then use our indicator of choice to only take trades in that direction.