Price, The Best Technical Indicator


What Is Technical Analysis?

Let’s step back for a moment and consider “what is technical analysis?” Technical analysis is looking at past prices or volume to predict the future. Forex traders use it as a means to identify potential trades, set criteria for entry and essentially time the market. It can be used on its own or in conjunction with other methods of analyzing the markets, including fundamental analysis.

When we first think of technical analysis, top of mind is usually that huge library of technical indicators including the popular Stochastic Oscillator, Bollinger bands, Moving Averages, and Average True Range, to name a few. The breadth of technical indicators is vast and wide and there’s a smorgasbord of choice for the wannabe forex trader.

Price Will Define Us

Let’s strip away all the possible complexity out there and think, well what is it that we’re really trying to trade? Well it’s not pullbacks in oscillators, moving average cross-overs or other fancy combinations. We’re trading PRICE.

Price is what will determine whether we win, we lose, breakeven or destroy ourselves. Price is of paramount importance to us. With a clear focus on price we can see the wood from the trees. Price is where two parties have agreed to meet to exchange money and when looking at it in relation to recent prices, it tells a story of the battle that created it. Who’s in control; the buyers, the sellers or neither?

Speed Out Of The Gate

Technical indicators typically require a number to be selected for the period.  That’s usually a number of days, hours or minutes. This variable can be short or long and the longer it is; the longer the lag is before the technical indicator responds to the movement in price. For example, EMA(10).

Compare this to price. Price is just price. It’s moving or it’s not. Its breaking new territory or it’s not. Price is raw data that does not need manipulation. It moves and responds in real time and that’s the movement we’re trading.

Here’s an example. Let’s presume in scenario one you were going to enter long when the price closes higher than the previous day (up candle) and it breaks out of the high of the most recent down candle. Compare this with scenario two where you entered long on the opening of the candle following a cross of EMA(10) and EMA(20). You can see that in scenario one you entered much nearer the beginning of the upward move and there was a lot still left in it, whereas scenario two took a long time to put you in the trade. Both are trading the same move that reverses in the exact same place. (Image 1)

technical analysis price indicator

If you get on board a move earlier there’s more of it to take before a reversal. If you trade based on indicators, for example a cross of moving averages – you get in the same move later, most of it has already transpired, and you risk coming late to the party.

Early entries lend themselves more to the likelihood that you can get a higher risk multiple per average profitable trade, as there’s a larger move available to take. With a higher sized average winner it allows you to be wrong more often and still be profitable.

As an example, if your average winner is three times the average loss, you only need to have more than 25% winners to be profitable. Compare this with an average win of 1.5 times the average loss, where you need to have more than 40% winners to be profitable. Strategies based on price are a lot more responsive than other technical indicators that lag somewhat.

Japanese Candlesticks Are Price Marked By Time

Japanese candlesticks are valuable in that they have a clear focus on price action. But I challenge you not to get caught up with the structure of what each candlestick pattern is named or what the textbooks tell you they mean. Think for yourself and ask yourself what they say about price and how it moved from “a” to “z”.

Just look at the sequence of patterns themselves and in layman terms consider, how did price move and what’s that saying about what’s more likely to happen next.

Let’s look at an example:

On the face of it the candle patterns look a lot different because of their body sizes. In this case the price may have moved exactly the same although the time period close off has put an arbitrary division across the price movement to form a much different pictorial look on the candles. (Image 2)

price indicator

Ask yourself, is there any statistical basis for saying that recency of the movement in terms of time will increase or decrease the probability that the price will break out and continue to the upside next?