Forex: It’s Organic!

mprincipatoGeneral Comments2 Comments

Ever hear the statement, “The forex market is very technical.” Or how about this one, “Technical
analysis works really well in the forex market because it’s more technical than anything.”
Usually statements like these come from promoters of indicators or systems that rely on some
combination of special oscillators or other proprietary formulas. For someone who is just starting
out in forex trading, what do you think these statements imply? These statements mislead new
traders into thinking the indicators on your chart offer some kind of unique advantage.
New traders love indicators. These include Bollinger bands, moving averages, stochastics, and
so on. I’m sure you can name a few. They love them so much that they like to jump from one to
another or even better, put them all on their screen at the same time. You know what they say
“more is better!” right? For some reason though, these same traders never seem to get those big
market moves they are looking for, or even worse just enter the market at the wrong time more
often than not. Time to find another indicator!
Actually here is a better idea: Remove them all from your charts. You may or may not have
heard that all oscillators are lagging in nature. They were created to smooth out price action and
offer some kind of perspective on the recent history of price. For example if you are looking at a
14 period RSI, that means you are looking at a value generated from the closing prices of the
previous 14 bars. Is this information useful? It can be, but even after knowing the intricate
nuances, none of these tools offer any kind of advantage in the market.
On a more subtle note, these indicators send unknowing traders the message that price is
reacting to the movement of the oscillator. The newer trader starts out believing that prices are
some kind of mechanical entity that automatically responds to lines, circles and other geometric
shapes on a chart. This implies exactness. Think about how such concepts can misguide your
expectations of price action in the immediate future.
Saying the market is exact is like saying the wind is exact. In reality, market prices are nothing
more than the reflection of the sentiment of a very large group of participants. Price is driven by
forces of greed and fear which are emotions that are found in nature. Why is it so important to
make such a distinction? So that you accept that the movement of prices of any instrument is
organic in nature and far from exact. Price are messy and very random much of the time. If the
market was not so random, we can do things like place limit orders on pivot points and make
money every time.
If you are having a tough time in the market and relying on the mechanics of indicators and other
such tools that measure price over time, take a step back and learn to appreciate prices for their
organic behavior. Take the oscillators off your chart and use a larger time frame peak or valley
to judge where your next turning point may emerge in the future. This is where price action
analysis begins.

Marc Principato, CMT

Risk Disclaimer

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