Forex trader Johnathon Fox, contributor, DailyForex.com, explains how price action simplifies the trading process and the mindset required to be profitable.
If a survey was handed out to retail forex and futures traders and one of the questions that was asked was “what method or system did they first trade with,” without a doubt the huge majority of traders would say they started with indicators such as moving averages, stochastic, MACD, Bollinger Bands, and the list of goes on and on.
I am super lucky that I get to talk and help traders with their trading goals everyday, and the list of systems and methods that I come across with indicators is endless. You only have to look in any forex forum to see how many new traders are clambering all over the “forex systems” threads looking for the latest indicators and EA’s because people come up with new indicator systems every chance they get (not necessarily profitable ones).
The reason indicators are so popular is that they feed into the new trader’s belief that the indicator can help predict where price is going to go. To understand indicators properly, traders need to understand how indicators are built and project their information. 99% of all indicators are built using old price information to make a lagging indicator. For example; a moving average is built using old price to make a moving line that traders can use in a number of ways.
The major problem with indicators is that they are always lagging and traders are using previous information to guide them. In other words; they are using lagging information to make live trading calls.
A Dangerous Trading Mindset
The other major worry with indicators is that traders very rarely stop at one indicator and this is often where things begin to go pair shaped in the trader’s mindset. A new trader will often have one or two winners with their first indicator. It does not matter how many losses the trader has or even if they blow their whole account. What the trader will tend to remember is that first indicator helped them make a winning trade, and most of all, the trader will remember that this first indicator helped them predict correctly where price was going. All the bad thoughts and losses have been completely pushed to the side because the trader has already moved onto what is coming next and they have already worked out EXACTLY how they will make it all back and much more.
The trader will often think “if one indicator helped me make a winning trade, then two indicators are sure to help me predict where price is going even better,” and then when two doesn’t help, three has to be even better etc, but the problem is that like so many things in trading, it simply just doesn’t work this way as I explain below. Humans in everyday life are programmed to think that anything worthwhile cannot be simple and new traders often spend a lot of their time trying to make trading complicated adding fancy indicators to their trading thinking that the more indicators they add, the more they will be able to predict where price will go, but this is the COMPLETE opposite of what traders need to do.
This mindset is a trap that is very easy to fall into because the trader can quickly find himself adding more and more indicators as he starts having more and more losses with the incorrect mindset that indicators will help him predict where price is going. What ends up happening is the trader goes from the start of his trading journey being in the best mindset to play trades, to having so many indicators on his charts and being in a complete mess and state of analysis paralysis. The trader ends up having so many indicators on his charts that they all end up contradicting each other and the trader can no longer make a trade because he is so confused at what he should do. So what does the trader need to do?
Time to Move to Price Action
The most simple and uncomplicated trading method in the world is price action. All that is needed for trading price action is a blank raw price action chart and your trading method. The major difference between indicators and price action is with indicators you are using old lagging price action information to try to predict the future, but with price action you are continually reading the raw and live price as it is being printed on the chart.
There are no indicators or outside influences at all used to trade price action. Basically price action trading is the skill of being able to read the price and make trades on any chart, in any market, in any time frame and without the use of any indicators at all.
Education and commitment are needed to be successful with price action trading just like any other trading methods or systems that are worthwhile, but the reason price action trading is so successful and so many professional traders use it is because it simplifies the trading process and the mindset required to be profitable.
By Johnathon Fox, Contributor, DailyForex.com
