Public Exchange Analysis: Is there a best technical indicator for foreign exchange?

Since everyone's tolerance for risk is different, there is clearly no indicator in the world that is best for everyone. Some people may be satisfied with a 2-to-1 profit-to-loss ratio and a 40% profit margin, while others still want most trades to be profitable regardless of the profit-to-loss ratio. It is worth noting that those who prefer profitable trades to losing trades tend to focus more on winning rates.

Another key to this problem is that if you put ten traders in the same trading room and give them the same indicators and securities, you will see ten different operating results at the end of the day. By the end of the day, the differences between these results will become more apparent. This is because the indicators themselves are only for reference, traders make decisions about when to follow indicator signals based on personal experience, and at least some of them deliberately avoid certain indicators. In other words, they selectively filter the signals given by the indicators.

Third, it is not wise to trade on a single indicator. No indicator can be accurate forever. The best way to use an indicator is to apply it through multiple validation. When you see an inverted K-line pattern, a break in support and resistance, and a buy or sell signal from an algorithmic indicator, you are doing well. One indicator may be wrong, but the probability that all indicators will be wrong at the same time is very low.

Fourth, we often refer toforeign exchange marketIt is fractal, meaning that if you do not mark the time period, it is difficult to tell whether the chart in front of you is a 10-minute chart or a daily chart. The trend patterns look similar, so the performance of the indicators should be roughly the same. This is true in most cases, but not absolutely. For example, the daily closing price is always the most important value in the chart, and the closing price of the 10-minute, 1-hour or even more common 4-hour chart cannot be compared. Therefore, indicators that rely on closing elements, such as the relationship between highs or lows and the closing price, are actually more suitable for daily charts than 15-minute charts. Everyone knows the meaning of the closing price of the trading day, but the understanding of the "closing price" of the one-hour chart may vary.

Finally, algorithmic-based metrics have a degree of "objectivity". Different people will get the same value through the same formula, but the metrics do not measure physical entities. The flow of water that engineers measure can be measured by the exact same amount of water in a pipe per unit of time, but the price of a security is not the flow of water in a pipe. Measurements borrowed from science do not make technical analysis truly "scientific". It measures human emotions, which behave in very different ways than water or other physical objects. Note that many of the top metrics were invented by people such as Welles Wilder, Tushar Chande and George Lane - who kept creating new metrics precisely because prices do not behave in the same way as objects.

Taken together, we can still list some of the recognized excellent indicators. Your mileage may vary, but any list of top Forex technical indicators will typically include:

Support and resistance levels

ADX

RSI

MACD

Stochastic Oscillator

Fibonacci Retracement

Ichimu balance indicator

When you flip through a book or browse a chart on the web, the bottom of the price chart tends to contain at least one of the above indicators, usually two. (In stock trading, we generally increase the volume indicator, but as mentioned earlier, the foreign exchange market does not provide volume data directly.)

It is worth noting that the popularity of indicators changes over time. For example, in 2014, the ADX lost popularity because it took a long time to interpret; in 1990, the MACD gained popularity; in 2000, the stochastic oscillator became the focus of the market. The RSI has never really gone out of style, while the Ichimu Balance indicator (a special candlestick chart that contains moving averages forward and backward) became popular around 2008 and remains a strong concern today.

Based on the experience of the past 35 years, the most stable and reliable foreign exchange indicator on the daily chart is the MACD. Although MACD is a momentum indicator and "leading", it can also be wrong or show uncertainty in some situations, and may not be suitable for everyone's trading cycle.

If you decide to use all the top indicators, you will quickly find that the charts become very cluttered and the various signals conflict with each other. You can only choose a few of them to use. If you plan to use all the above indicators at the same time, plus moving averages, channels and bands, then a single chart cannot hold everything, and you need to switch to multiple charts. If you also overlay multiple time periods to verify the data, the analysis task will be even more onerous. It is easy to deal with with 12 charts (4 charts per time period, a total of 3 time periods, each with 2 indicators), but this does not include K-line pattern analysis or auxiliary tools such as point charts and brick charts.

You will often see someone promoting a certain indicator online or in the mail, claiming that it never goes wrong, generates huge profits in a very short time, and is the only tool you need. As you learn more about what this indicator is, you will always find one interesting thing: it is usually RSI or MACD.

Therefore, your mileage may vary. The only way to find the best indicator for you is to backtest selected indicators individually or in combination over a short period of time, depending on different market conditions. Statisticians will remind you that you need at least 30 samples of observations before making any inferences. You don't necessarily need to use specialized software to perform reasonable backtesting (in fact, relying too much on backtesting software can lead to the trap of finding ideal parameters). You simply record the chart with the indicator data with a pen and paper, note the result of each buy or sell, and note the error signals emitted by the indicator. A simple way to verify this is to draw a vertical line at each decision point. The truthful record will tell you whether this indicator is truly suitable for you.

In order to be more comprehensive, if the intensity of the manual backtest is not enough, you also need to set a stop loss level and a target level for the indicator. Alternatively, use a stop loss steering strategy: when the indicator signal turns, both exit the current position and establish a reverse position at the same time. However, if you find yourself hitting the stop loss level frequently or the target level is difficult to achieve, then there is no need to study the specifics of each trade one by one.