Is Using Indicators on FX Charts Absolutely Necessary?

In the FX trading, there are numerous indicators available, but do you believe that by displaying them on your chart, your trading accuracy will undoubtedly increase?

If you are thinking that it will “undoubtedly increase,” you might be a bit mistaken.

Is the use of indicators essential in FX?

In FX, there are many indicators available, but do you believe that displaying them on the chart is absolutely necessary?

From my personal standpoint, I think that you can succeed in FX trading even without indicators.

When I look at the charts of people who are not winning in FX, it often appears to be cluttered with indicators, like in the example below:

When I look at charts that are so cluttered, I often wonder “What are they able to read charts from this mess?”

For instance, if someone is able to make consistent profits in FX by fully utilizing all these indicators, there’s no issue at all.

It’s truly impressive for me who don’t use indicators.

However, when I observe the charts of successful FX traders, they tend to be remarkably simple. Most of the consistently winning traders in my circle primarily use just horizontal lines and candlestick patterns for their trading.

Even if they do use indicators, they typically limit themselves to one or at most two well-known ones, such as Moving Averages (MA) or Bollinger Bands.

The drawbacks of overloading with indicators

Displaying an excessive number of indicators on the chart can lead to various issues when it comes to trading.

Candlestick patterns become less clear to read.

In my opinion, not only in FX but in any market, I consider candlestick patterns to be extremely important when analyzing charts.

Particularly, even from a single candlestick, you can often discern “which way it’s likely to move next,” making it quite critical.

Therefore, cluttering the chart with indicators can obscure candlestick patterns, which can be a significant drawback.

For instance, in the chart image below with the yellow circle, you can see signs of a trend reversal from an uptrend, which allows for a selling entry.

First, at a glance, when you look at the chart, it’s in an uptrend, with dip buying occurring, and it’s strongly moving upward like a V-shape.

And after forming the V-shape, it retraced for a moment, but now there’s another round of dip buying.

However, if dip buying has occurred, there should be updating new high, but there seems to be no upward momentum, and it’s making lower high, forming a mini double top.

So, this leads to the conclusion that there is “no more upward strength,” which allows for a sell entry at the yellow circle in the chart image below.

By carefully examining candlestick patterns like this, you can quickly identify reversal points.

However, if you clutter the chart with too many indicators, as mentioned earlier, you won’t be able to discern these subtle movements, making it difficult to make entry decisions.

As a result, this can lead to delayed entries and situations where you “could have entered, but didn’t,” causing missed profit opportunities to become more frequent.

The number of entry opportunities decreases significantly.

When results aren’t going well in FX, people often think that adding more indicators will lead to “improved trading accuracy.”

However, this is not the case.

In fact, the more indicators you add, the more filters you introduce, which can make entry conditions stricter.

For example, comparing a trading rule like “Buy entry when RSI is below 20” to a rule like “Buy entry when RSI is below 20, MACD is below 20, and there’s a 30% deviation from the Moving Average,” it’s clear that the latter has stricter entry conditions.

With such stricter entry conditions, the trade frequency decreases.

In the context of short-term day trading, having too many indicators becomes a drawback because it necessitates a rapid turnover of funds.

Worst-case scenario, having too few entry opportunities can lead to frustration, prompting traders to make unnecessary trades, which can result in significant losses.

Curve fitting becomes more likely.

When you overload a chart with indicators, it becomes more susceptible to curve fitting, which is also known as over-optimization.

This is a common phenomenon when creating rules for automated trading.

It involves excessively optimizing the indicator parameters to match historical price movements. By doing this, the indicator values align perfectly with past charts, allowing for high win rates.

However, it’s important to note that future charts won’t follow the exact same movements as past charts.
They will, at most, exhibit “similar movements.”

So, when you add numerous indicators, they can become excessively optimized for past charts, causing them to perform poorly in the face of future chart movements.

In fact, I used to be in a similar position myself, displaying multiple indicators and creating strategies based on historical price movements.

However, when I put these strategies into practice, I found that the trade frequency was low, and I experienced a streak of losses, leading to a decline in my capital.

Indicators should be used as supplementary tools.

Indicators should be used strictly in a supplementary role.

In the context of cooking, they are like spices.

For example, when making Japanese cuisine, you only need three basic seasonings: sake, soy sauce, and mirin.

Yet, if you start adding extras like sauce, mayonnaise, salt, pepper, sugar, vinegar, miso, and more, you can easily ruin the original taste, resulting in a terrible dish.

In the case of FX, it’s similar to adding too many seasonings.

When you incorporate numerous indicators, you can lose sight of the essential points to consider, leading to chaotic and ineffective trading.

This results in the creation of strategies that don’t work.

Therefore, in FX, indicators are not an “absolute necessity,” and even if you choose to use them, one or two are typically sufficient.

Summary

Indicators are meant to be used as supplementary tools, and there’s no need to incorporate multiple of them.

Furthermore, when using indicators, it’s crucial to thoroughly understand aspects such as:

– How the indicator’s calculations are derived.
– What purpose it was created to serve.

Only by comprehending these elements, you can take use of their power effectively.

Therefore, if you’re tinkering with numbers and settings without truly understanding the principles behind the indicators, I believe that focusing more on chart patterns and candlestick formations can lead to more stable trading.

If you want to learn more about this approach, please read the following article.
The Ultimate FX Strategy: Reading Psychology from Charts