So many traders want to find that one tool or indicator that will do it all in trading so that they won’t need to look at any other indicator.
And it’s true that simplicity is the king when it comes to trading the markets and having a chart overplayed with 10 indicators is definitely not a good way to trade.
Still, there is such a variety of factors that affect the everyday gyrations in currency exchange rates that just looking at 1 or 2 of them leaves you rather uninformed.
As traders, we must be able to make informed trading decisions in order to improve our chances of being successful. That is not to be confused with being obsessed with every little detail from every indicator or small price movement.
What I mean by this is a trader must be aware of all key factors that will affect a particular trade before making the decision to take it or not. Not doing this will result in taking bad trades that could have simply been avoided by just taking a glance at one of the trading tools such as the calendar, an indicator, a support zone or any other parameter that is important in Forex trading.
Once you start looking at the different indicators and factors that drive currencies you’ll start to notice that some trades are supported by a multitude of signals while other trades are only supported by or 1 or 2 of the trading tools.
Looking for convergences and confluences on the charts (fundamentals are also a key factor to consider) before you take a trade is very important because the more signals converge and point in the same direction the more likely it is that a trade will be profitable. This is one of the basic principles of trading that all successful traders use and which will help you to save and make countless pips in the Forex market.
A simple rule of thumb to keep in mind is that the more factors converge and confirm each other the better the probabilities are for the trade to be a winner in the end. It’s only logical then that a buy signal that is confirmed by 5 other indicators and/or signals is more likely to give a winning trade than a buy signal which is confirmed by only 2 other indicators.
However, don’t be fooled to think that if enough indicators confirm each other then there is no way for the trade to be a loser. Nothing can be further from the truth, and in fact, perfect looking chart setups can fail just as miserably as any other trade setup.
It’s also very important to remember to look at and analyze different types of indicators. That is to say, a stochastic confirming the RSI is not that much of a big deal because both indicators are of the same type and they most often show the same thing (both are overbought/oversold indicators and generally both move in the same direction). A better confirmation would be if the Stochastic or the RSI are confirming a strong support or resistance zone on the chart, or maybe a Bollinger Band.
The main point here is, look for different tools and indicators to confirm each other but don’t look for indicators of the same type for confirmation. In fact, it’s best if you use only 1 or maximum 2 indicators of the same type. By doing so, you’ll avoid the dreaded paralysis by analysis and you will still be informed and aware of everything that’s going on in the markets.
Finally, if there is one quick Forex tip to remember then it’s this:
Always look for multiple signals to converge at the same point and in the same direction and just by doing that you will significantly improve your chances of making winning trades.