Five Signs of a Useless Forex Indicator

Hello, fellow Forex traders!

Modern trading platforms allow you to analyze and predict the movements of currency pairs using indicators. Metatrader 4 terminal, widely used on Forex, contains about 50 such instruments. This number can be increased to theoretical infinity thanks to the built-in MQL4 programming language.

But a large number of indicators does not mean their quality. In today’s article, we will try to figure out which indicators should definitely not be considered as trading assistants.

New “self-written” indicators have been continuously appearing for two decades. The demand for the services of programmers and the intensity of the search for experts advisors and scripts are not weakening for quite understandable reasons:

• Trading systems using indicators are short-lived;

The market changes the volatility or the direction of the trend, which leads to a sharp decrease in the win rate, which sometimes cannot be corrected by simple optimization of the parameters, you have to change the trading system.

The number of algorithmic traders is growing;

The development of technologies simplifies the use of robots in trading, including for beginners who harbor the illusion that it is possible to automate the receipt of profit on Forex.

• Creation of custom indicators, scripts and advisors – is a separate profitable industry.

In the latter case, a situation often arises that an absolutely non-functional indicator is being sold or offered for free. Let’s say he got it just like that, but the future user will spend time installing, testing and debugging.

He will probably correspond with the programmer, trying to figure out what the problem is, which will lead to an even greater loss of energy and time, and maybe even money. The article describes how to save your resources and quickly recognize the uselessness of the proposed indicator.

Indicators without specific signals

With the advent of indicators, trading has become easier in the sense that intersections of lines and overbought levels or changes in the histogram give clear signals and rules for opening a position. This is a significant advantage over graphical analysis, which requires special care when detecting patterns and constructing geometric shapes.

If the indicator does not have clear and simple Buy / Sell signals, instead of generating which it simply follows the course, it is objectively useless.

Below is an indicator that uses, according to the Noxa developers, a very complex formula for calculating entropy. It is able to determine how predictable the movement of the current candle is.

Results from 0 to 1 suggest that a high value gives 100% prediction accuracy. The problem is that the indicator does not indicate exactly how the day might end – with a downward trend, an uptrend or a flat.

If a trader does not understand how the signal is implemented on the chart, then he will not be able to test the instrument, and indirect indicators are interesting only from an analytical point of view and do not affect the profit in any way.

A large number of losing trades in examples

Each author of the indicator strives to assure the buyer or potential consumer as much as possible (if the code is distributed free of charge) in the future profitable use of his own instrument.

In the first minutes of watching or reading the presentation, a trader should see that before him, at the most, is the holy grail, at least – a useful tool that solves the problem of flat, countertrend or trend trading.

The developer knows the positive aspects of the created script / indicator and tries to show them in the presentation of screenshots. There should be a lot of positive trades, and somewhere aside, there should be a passing mention of possible losses.

Pay attention to the screenshots of our topic “Arrow Indicators”. Everywhere in the figures the prevalence of profitable trades is shown. Each indicator has vulnerable zones that give a series of losses, but which developer will choose them for presentation?

If a predominance of stop-losses and losses is found in the pictures of the instrument that interests the trader, it is better to bypass this topic.

High frequency indicators

High-frequency indicators came along with scalping strategies that require traders to be skilled in manual trading, however, they are not always suitable for Forex.

In the slang of traders, this tactic is called “pipsing”. Some brokers expressly stipulate its prohibition in the client agreement.

This type of trading is not possible on accounts with a fixed spread, the costs of which will consume most of the profit. Testing a strategy with many trades in the tester may not take into account losses from requotes, technical failures of the terminal, and non-market quotes.

If the broker allows for scalping trading, the trader will still need the following high-frequency signals for the indicator:

• Trade automation;
• VPS;
• Opening a special account with zero spread and minimum brokerage commission.

After the above conditions are met, the question remains about the stability of the broadcast of quotes and the speed of order execution. This factor will be a constant unpredictable element for predicting the profitability of a strategy.

Indicators without settings

The programmer offers an indicator where in the input parameters the trader can only adjust the colors. In the worst case – it is an API that broadcasts the signals of a certain miracle robot located on the server under the supervision of the seller of this grail.

In the first case, the impossibility of setting will lead to the period when the algorithm will fail with the next change in the direction of long-term fluctuations in the foreign exchange market. And nothing will prevent the downloaded indicator from draining the trader’s deposit at the first launch or after a month of work. This is unpredictable – after all, the algorithm of operation is unknown, which means that it is impossible to predict the failure of the strategy.

Only an online robot can be worse than the above option. In this case, the trader is even deprived of the opportunity to check the operation of the algorithm on history. It is hardly worth relying on the good faith of the seller or distributor of paid subscriptions. Signals can be given by both a Martingale strategy and crossovers of two moving averages, or any other simple strategies available in all terminals for free.

The meaning of any indicator lies in the idea of ​​a strategy that a trader must study and understand. Having understood how the signal arises, the user modulates this process for himself. Ever since the time of the Turtles, it has been proven that there are no equally trading traders on the market. Having comprehended the theory, in practice, gradually each of us develops unique indicator settings and tactics of their use.

Level indicators

If the indicator plots only support or resistance levels, then it is useless for algorithmic trading, and the effectiveness of these signals cannot be checked in the tester. As a rule, such a tool draws not one, but several lines, implying a whole system of rules that make it easier to find the bottom and top of the market.

At the beginning of the topic, it was noted that the meaning of using indicators is the uniqueness of their signal. Displaying levels is more related to graphical analysis, where, in addition to resistances and supports, the shape of candles, patterns and other Price Action elements are important.

If a trader has the skills of candlestick analysis, then building levels is one of the elements of this knowledge, for which he will not look for a level indicator.

A user conducting a targeted search for indicators needs a strategy or idea related to the formula for calculating OHLC prices, volatility, volumes and other objective-digital indicators of the Forex market. Drawing levels is not one of them, but it certainly looks beautiful on the chart.

Conclusion

Finding indicators – is a necessary trading routine; to optimize this process, research new strategies on reputable thematic resources. This will help to deal less with the five cases described above.

Each indicator must be tested on a demo account with Metatrader before using it in the trading system.

Take care, Michael

Forextraderportal.com

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