09 June 2010

Revealing Indicators

A ranging rally will tend to fall. Why, because it is not a rally it is a range. Anyway let's talk leading indicators. One does not say they predict. One says they give you better odds. But do they ? If they do not predict and they are premised on a future event, how do they improve the probability of the outcome you desire happening. Well they do not.

The Stochastic used as an overbought indicator will either say everybody buying is wrong (unless they are doing it for strategic reasons) or they are right. The point is you make a decision, like a coin flip and cut your losses or ride if you are correct. That is the core method of forex.

But it is possible to exploit market structure and improve your information and thus improve your profits (knowledge = $$$). The RSI for example gives you an insight into market structure.

Divergences tend to work (I use RSI and Ehler Fisher as it is more precise). They are not predictive they are revelatory as they tell you what you are seeing in price structure is not quite what is seems. A good indicator will reveal, not predict. I use USD/JPY, EUR/USD and EUR/JPY like this, they reveal structure in both the forex and equity market. I prefer RSI to Stochastics in forex because RSI reveals market structure better.

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