Why I Ditched Technical Indicators (And Why You Should Too)

technical-indicators

Technical indicators are no doubt a favorite topic in the financial markets. They can range from a simple moving average to a complex array of algorithms.

It doesn’t matter whether you’re trading stocks, commodities, futures or any other market; technical indicators are a common theme.

Useful? Well, that’s another matter entirely.

But of all the financial markets, Forex is arguably the worst offender of overutilizing indicators. Proprietary languages like MetaTrader’s MQL have made it relatively easy for newcomers to design anything imaginable.

Other trading platforms offer similar languages. There are even businesses that do nothing but custom code indicators for clients.

And if you ask me, it’s closer to being part of the problem than the solution.

With an infinite number of indicator combinations, how on earth are you supposed to find something that works?

Well, if your journey turns out to be anything like mine, you will dismiss the idea of using indicators as buy and sell signals. You may keep one or two as I did, but for the most part, they’re an unnecessary burden.

Everything you need to trade successfully is already on the chart; it has been the whole time.

In this post, we’re going to take a detailed look at why I decided to scrap technical indicators. I’ll also share what I use in their place.

As always, be sure to leave any questions or comments at the bottom of this post.

Let’s begin.

1. Indicators Distract From What's Important

distracted tradingAs a currency trader, what do you buy and sell?

Currencies, of course! That may seem like a silly question to ask a group of Forex traders.

But here’s the thing…

I wasn’t really buying and selling currencies when I was using indicators many years ago. I mean sure, I was technically buying one currency and selling the other.

But every decision I made was based on a signal from a group of indicators.

The chart underneath it all was inconsequential to me. It could have been the EURUSD, GBPUSD, AUDUSD or any other currency pair.

That doesn’t sound like a trader to me, at least not one who’s going to make money in the long run.

Of course, the underlying chart didn’t matter to me at the time because I was relying on a random set of lagging indicators to make decisions for me.

I thought I was being a trader.

The truth is I was being lazy. I was also following the herd blindly, hoping that I’d stumble across some magical combination of indicators that would make me wealthy.

But I can’t be too critical about the path I chose. After all, I didn’t know what I didn’t know.

Also, that path led me to something much better. More on this shortly.

Because of the indicators I was using back then, I wasn’t getting to know the charts or how price ebbs and flows around key levels. I was just clicking buttons because a few squiggly lines said it was time to buy or sell.

That’s a problem, isn’t it?

It was for me, and my deteriorating account balance was proof.

When I think back on the experience today, it amazes me that I didn’t blow more trading accounts. And believe me, I went through a few between 2007 and 2010 to get where I am today.

Don’t get me wrong. I’m not saying all indicators are bad or that those who use them are wrong to do so. Even I use two moving averages which we’ll get to later in the lesson.

But to rely solely on them without first learning how to read price action is a mistake.

That’s just my opinion but having been involved with trading since 2002, I can tell you that there’s no better indicator than raw price action.

It has the most direct relationship with market participants and is the least lagging of the bunch.

2. Indicators Are Condition-Dependent

You’ve no doubt come across one of the sales pages for a Forex trading robot, or Expert Advisor (EA) as it’s called in MetaTrader.

In fact, if you’ve been in the business for a while chances are you’ve seen quite a few of these offers.

What’s curious is that they all seem to be promoting the same thing – a high win rate.

I always find that odd considering a high win rate is entirely unnecessary. Sure, it makes you feel good to win, but a ratio of wins to losses is 100% inconsequential on its own.

As George Soros famously said…

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

But that’s a topic for another time. For now, I want to focus on the sales pages for those trading robots I mentioned.

How in the heck do they achieve those win rates? After all, most of them are backed up by something like Myfxbook.

Well, I’ll tell you how they do it…

The developer designs the EA to function in a particular market condition. Yep, they rig it, so the performance stats look great, but the robot is entirely dependent on specific conditions.

That’s why most of them only work on certain currency pairs – because the developer designed it to look good on only those pairs.

Perhaps it’s been tailored to range bound price action or only works in a trending market.

But what happens when those conditions change?

You guessed it. The EA stops performing. That $500 piece of software is now obsolete, and you’re left searching for a new trading strategy a bit poorer than you were before.

Oh, and if you’re wondering what the other half of those developers do to get a high win rate, the answer is they cheat.

Yep, the performance is pure fabrication. There may be a few that are legitimate and can work with a few modifications, but the vast majority fail over an extended period.

How do I know this?

Having been a trader since 2002 and solely involved in currencies since 2007, I’ve done my share of research. I’ve also had the opportunity to connect with traders whose experience far exceeds that of my own.

I may get some hate mail for what I just said, but that’s okay. Those who have been around the block know that what I say is true.

The key takeaway here is that indicator-based strategies will always be condition dependent. If it’s designed to work in a trending market, it will likely blow your account when that market begins to consolidate.

Even the large hedge funds aren’t immune to this. It’s why some go out of business after years of turning a profit. And those who make it pay millions of dollars to have their algorithms fine-tuned so that they don’t go bust.

But do you know what isn’t dependent on market conditions?

Price action!

Simple yet effective strategies like the pin bar, inside bar and engulfing patterns have worked for decades and will continue to be effective for years to come.

And if you construct a sound strategy for managing risk, they can serve you very well over the course of your lifetime.

Sure, you may have to stay on the sideline occasionally. But once you know what to look for, these price action strategies work regardless of whether markets are range bound or trending.

Even chart patterns like ascending and descending channels, wedges and the head and shoulders have been around for ages.

Why is that? Why do indicator-based strategies have a limited shelf life while price action lives on?

Let’s find out!

3. Psychology Is King

trading-psychologyPsychology drives markets. Gather millions of people from around the world, give them access to a computer and ask whether they think a currency is too high or too low.

That’s the Forex market in a nutshell.

Of course, we all know that profiting from it is another matter entirely. But deciding whether we think a pair is likely to move higher or lower is all we’re doing. That’s what each of us is doing when we buy or sell a currency pair.

And in a collective sense, what market participants do is illustrated via the price action on your charts.

Now, what happens when the EURUSD approaches a level that has acted as resistance for the past six months?

If it’s an obvious level, chances are it will attract sellers.

Everyone can see that same resistance level. You may not have it marked on your chart or see it in time to take advantage of it, but it’s there.

It doesn’t matter whether you’re using a MACD, RSI, Stochastics, moving averages or some fancy combination of proprietary indicators.

The key support and resistance levels are there for everyone to see and use.

But while the price action is the same for everyone, the indicator combinations are far from it.

Let me ask you something…

How many indicators are there?

500? 1,000? Maybe 5,000?

There is no number. It’s infinite considering you can code to your heart’s desire using something like MetaTrader’s MQL.

That’s an issue, right?

Your indicators are telling you one thing while the next trader sees something completely different.

For the price action trader, that resistance level on the EURUSD is universal. There are no variables like indicators to get in the way.

And as I mentioned above, things can get dicey when the market decides to stop trending. Because if you designed your indicator-based strategy to work in a trending market, it’s going to fail when markets begin to consolidate.

But once again, the price action trader isn’t phased. It doesn’t matter if the market is trending or range bound, the psychological support and resistance levels will always tell the real story.

At the end of the day, that’s all you need to become profitable.

4. Indicators Overcomplicate a Simple Process

Trading the Forex market for consistent profits is not complicated, or at least it doesn’t have to be. Those who have taken my course and are part of the Daily Price Action community know this.

But that doesn’t stop most traders from overcomplicating things.

Just look at how MetaTrader – arguably the most popular Forex trading platform – starts traders on their journey.

EURUSD-technical-indicators

The chart above was taken directly from a new MetaTrader demo account. Not all platforms start out this way but the vast majority default to some combination of indicators.

You know what’s ironic? The name of the template above is “popular.”

If that is indeed a popular template, it’s no wonder most Forex traders struggle, especially in the first year.

Now, don’t get me wrong. All technical indicators are not necessarily bad. I don’t want to give them a universal label like that.

The issue is that many traders abuse them. They add four or five indicators to their chart, watch for crossovers or oversold and overbought conditions and then pull the trigger.

The thing is, they don’t even know what they’re buying or selling.

Those same traders tend to get frustrated when they don’t see some form of consistent profits after a month or two.

So what do they do?

They begin looking for a new indicator or perhaps an entirely new trading strategy. And given the infinite number of indicator combinations out there, it’s no wonder so many never find what they’re looking for.

It’s a vicious cycle.

But I’m not judging. This is not a me versus you post because I’ve been where you are now.

What’s the real issue?

Any new endeavor has a learning curve. Some might be a few weeks while others can take a few years. For most, trading falls into the latter half of that range.

One of the issues with using a trading system built around indicators is that trying to pinpoint the problem is an uphill battle.

Let’s assume Frank has been using a trading system that utilizes the MACD, RSI and four moving averages. He’s been trading for a few months but has only losses to show for his efforts.

But Frank is determined to make it work, so he decides to deconstruct the strategy to try to isolate the problem. His goal is to figure out if it’s the MACD, RSI or any one of the moving averages that’s causing the issues. Perhaps it’s even a combination of these indicators.

Talk about problems…

I don’t envy Frank one bit in this situation. There are hundreds if not thousands of technical indicators available for the MetaTrader platform.

So he’s now supposed to go out and sift through thousands of options to find the one that works? Who knows if the strategy he’s employing will work regardless of the indicators he uses.

What’s worse is that it will take him at least a month or two to figure out if the new addition is useful.

I speak from experience here. My first three years in the Forex market (2007 to 2010) were spent testing various indicator-based strategies.

It was a painful grind. The only reason I made it through is that I was obsessively passionate about trading and stubborn enough to see it through.

A simple solution

The way to untangle the mess of indicators on your chart is quite simple yet highly contested by most traders, particularly those just starting out in the business.

The solution is to remove every indicator from your chart.

Yes, all of them! Even the coveted MACD or RSI has to go.

You can add one or two indicators later, but not until you fully understand what’s happening with the price action on your chart. Otherwise, you won’t know if they’re actually adding value or if you just like them because they look cool.

Let’s face it; most new traders choose indicators based on how they look, not their function or added value. That’s what I used to do.

Take it from me. Until you can read the raw price action on your chart, you have no business adding indicators.

Some will argue this point, and that’s okay. Everyone is entitled to an opinion.

But after more than 15 years of trading financial markets and teaching thousands of traders, I can tell you that adding indicators before understanding price action is a mistake.

The Two Technical Indicators I Use

Yes, even I use technical indicators. But before you start thinking I’ve been hypocritical up to this point, let me explain what I use and why.

As you may well know, I favor the 10 and 20 exponential moving averages (EMAs). Those are the only two indicators I use. You will never see any MACDs or RSIs on any of my charts.

Why the 10 and 20 EMAs, you ask?

I primarily use these moving averages as a way to identify the mean. So let’s run through that for a moment to clear up any confusion.

In math, the mean is the average of a set of numbers. It’s the “central” value of any set of numbers.

So if we had the set of numbers 1, 2, 3, and 4, the mean would be 2.5.

We get that by adding the four numbers together and dividing by four. It would look like this (1+2+3+4) / 4 = 2.5.

What does this have to do with the markets?

Everything! Financial markets are just the visual representation of what happens when math and psychology collide.

Every market regardless of whether it’s stocks, currencies, commodities or something else has a mean. Moreover, every market always returns to the mean.

That isn’t a possibility or even a probability; it’s a mathematical certainty.

With this in mind, I use the area between the 10 and 20 EMAs as the mean during a trend. This keeps me from buying too high or selling too low.

Here’s an example from the AUDUSD daily chart.

mean reversion and overextensions

For teaching purposes, I’ve exaggerated the area between the 10 and 20 EMAs you see in the chart above. But notice how price returns to the mean before making the next move higher or lower.

The concept of mean reversion is one of my broad-based rules for entering a trade. If a pair is too far from its central point, I will stay on the sideline regardless of how appealing the rest of the setup may be.

The Ironic Evolution of a Price Action Trader

There is a universal satire about the evolution of humans. The image usually depicts a baby turning into a grown man and later becoming elderly.

The irony is that in many ways, we end life how we started it.

In a similar but not so serious vein, price action traders are the same. We start out not knowing anything about indicators, so we set off on a mission to learn everything there is to know about them.

But somewhere along the way, we get frustrated enough to purge our charts of the clutter.

After all the struggle, we end up right where we started.

The only difference is we go from not knowing anything about indicators to not caring much about them. They become a distraction and a nuisance rather than an advantage or a benefit.

You know why?

It’s because everything you need to know is right in front of you. It has been the whole time.

I can’t see your charts, but I know it’s there. All you have to do is pull back the proverbial curtain, and you’ll see it too.

Final Words

If you want to become a great price action trader, a clean chart is a must. Otherwise, you’ll end up spending your time sifting through useless technical indicators rather than learning to read the activity on your chart.

Attempting to troubleshoot complex indicator-based strategies is a nightmare. By using simple price action strategies, you’ll reduce the learning curve by half if not more.

If you feel deep down inside that indicators are the way to go, that’s okay. Just be sure to spend some time learning how to read price action. It’ll undoubtedly help you in the long run even if you decide to use an indicator-based strategy.

Whatever you do, keep it simple. Learning how to trade Forex doesn’t need to be a complicated process. In fact, it should be just the opposite.

Master one or two price action strategies at a time. Incorporate indicators if you’d like, but remember that price action is all you need to become consistently profitable.

All you need is one pattern to make a living.

Linda Raschke

Your Turn

Are you still struggling to make technical indicators work for you? Did this lesson help?

Share your opinion or ask a question below and I’ll get back to you shortly.

Leave a Comment:

42 comments
Earlyn Shuffler says

Thank you Justin,
I have been using the 8 and 21 EMA trend lines to identify entries but really appreciate the great insights, which you have shared. I trade a small account so can you tell me if I can apply the same principle of market mean to a lower time frame eg. hourly or four hour?

Reply
    Justin Bennett says

    You’re welcome, Earlyn. The concept of mean reversion works in any market and on any time frame. However, you’re going to experience a greater number of deviations on an hourly chart than you will from something like the daily time frame. Those deviations can make trading more difficult, which is why I prefer the higher time frames.

    Reply
tradermav says

Hi Justin,

I experienced the very same journey you outlined — researching and trying almost every indicator — only to come full circle and end up back at price action, trendlines and s/r levels.

Thanks for sharing and new traders would be wise to take your advice.

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akhtar butt says

Hi , Dear Justin, pretty and detailed explaination as always about indicators effects. You are absolutely right, raw price action is a basic foundation. indicator can cheat but price action does not cheat and consistently remain with us in all weathers. Thanks

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Freddy Mpho says

Good day
All said on the blog cuts numbers of years struggling and blowing accounts.
Big up to your trading experience

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Lynette says

Thank you so much

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Gulzar says

True & real essence of trading.

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Costa Vranas says

Justin thanks mate you have just opened my wife’s and my eyes… Its always what we have suspected but your lesson has put it all in focus. Too much clutter is not a good thing in fact its more confusing than not. We have been trading for almost 2 years and have ‘charted’ ourselves into a stupor and all you really need in front of you is price action not a ‘Christmas Tree’. Thank you for your invaluable guidance.

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    Justin Bennett says

    You’re welcome, Costa. Your experience is similar to what most traders go through. The source of just about every indicator out there is price action.

    So why use a tool based on something else? Just use the source. Cheers.

    Reply
Boštjan says

Thank you for a very insightful and detailed explanation, Justin.
I’m using a combination of 20/50 EMA and full stochastic (14,1,3) for entry and Fibo extension and/or sup/res levels for exit. I found the basic combination on the web, added (and adding) some of my own ideas, and I’m constantly profitable for 2 years now.
So I would recommend a simple combination of technical/naked trading as a way to a trading success.

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    Justin Bennett says

    You’re welcome, Boštjan. It sounds like you’ve found something that fits your personality, which is what trading is all about. Cheers.

    Reply
bep says

I completely agree with you. I was seduced by the automatic programming for a long time. I agree that a fundamental part of trading is psychology. Also it must have a well-sized account. I still have no clear ideas about stoploss. Is useful? if so it is useful for me or for the broker? Having a large account, maybe you can even survive without.
Anyway, thank you for sharing your experience. Whoever leaves lose. Who is tenacious in finding a solution won.

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Nko says

Hi Justin
yes I agree . I previously spent a lot of time trying to master various indicators and could not make my mind up which ones to use, but now just use a couple.
Nko
Nko

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    Justin Bennett says

    There are a few useful ones out there depending on how they’re implemented. For me, it’s the 10 and 20 EMAs. Cheers.

    Reply
Nkululeko Sondezi says

Thanks Justin for such info, may God richly bless you, i have just one question, what your take on Currency Strength Meter?

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Marcio Muniz says

Thanks Justin for another light. I have been using mostly Moving Averages mainly the 200 and 34 but I am still struggling to keep a consistent gains. As per your explanation in regarding the mean if I understood right the mean in your chart should be an EMA(15)? And as a normal approach those 2 EMAs you use works better in trend markets right?
Your posts and comments are helping me to tune up my trades so tahnks a lot for the time you put on this.
Regards.
Marcio

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    Justin Bennett says

    Marcio, correct. I use the area between the 10 and 20 EMAs as the mean for a trending market. They become less useful when markets begin to consolidate.

    Reply
Mimi says

Hi Justin, just a question on your MA’s please. Is the market bullish when the 10ema is above the 20ema and visa versa?

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    Justin Bennett says

    No, I only use them to find the mean. For trend analysis, I use price action (highs and lows).

    Reply
Peter says

Thanks Justin for confirming what I recently come to realize… I just use horizontal levels and use trend lines and dynamic levels to get bias and confluence.I recently noted a market which was
overbought with MACD above 80 and most traders trigger sales order at 70 but market proceeded to go up with another nearly 200 pips.Honestly if indicators work everyone would be rich since they are in those meta4 platform for free.Thanks.

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Chepsikor Bera says

Thanks very much for this insightful piece. All of a sudden things are starting to make sense.

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    Justin Bennett says

    You’re welcome, Chepsikor. Glad to hear that things are coming together for you. Keep me updated on your progress. Cheers.

    Reply
davy says

Hey Justin
I just read your comment here about price action.Al I see on your charts is what is happend not one in the future.If you see now a bearish pin bar on euro dollar at 1.10,h can you know that you go short for 200 PiP move you the downside,it still van shoot up to 1.12.

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    Justin Bennett says

    Davy, sorry, but I’m not sure what you mean by “in the future.” Are you suggesting that I show a pin bar that hasn’t yet materialized? That would be difficult, to say the least.

    Reply
Suresh Sekaran says

Hi Justin,

Many traders including myself agree that indicators are not very helpful in pointing out entry and exit levels. Hence, many have recommended to incorporate order flow trading in their trading to strategies to increase the chances of success.

Can you share your opinion on order flow trading and how it might be helpful?

Thanks & regards,
Suresh

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Webster says

Hi Justin
Thanks for this article! is there a way i could learn those price action stratergies?

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    Justin Bennett says

    Sure, feel free to browse the website. 🙂 If you want more you can also join the member’s area.

    Reply
Harrison Dauglas says

Well i appreciate your lesson and advice. But in nutshell, i had like to comment that their are many ways to skin the rabbit.
i never traded anything like price action but i will devote time to learn about it. i love knowledge.
But the flying devaluation comment by many traders that indicator are this or that is what i have not come to its realization.
i personally use multiplicity of time frame and conglomerate of indicator for my analysis and frankly speaking, it works well for me.
i spot top and bottom of market the same time price action traders claim they do using solely technical indicator.
Though it could be that it is not the way i understand indicator signal that most people do.
for moving average for instance, what i use is the curve of one moving average versus another in relation to price location to 400 DSMA for example.
though complex, but my only but 7years in financial market has made me to understand the chemistry of market movement such that when price is above 200 SMA on 1 minutes chart, but bellow 30 SMA on 5 minutes chart, i can tell where it is in relation to 50 SMA on daily chart.
so, everything depends on your studies.
The major problem traders have is to spot what works well for them.
And the long and short of my comment is that it is not the technical indicators that are wrong but we the traders.
“teach a horse the right way to fly, and you will be the first inventor of a flying horse”

(lets abuse the god of success and test its anger on us)

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    Justin Bennett says

    I don’t believe I said that no indicators are the only way. In fact, I even stated, “If you feel deep down inside that indicators are the way to go, that’s okay.”

    This post is only a reflection of my opinion on the matter. As I’ve said countless times on this site, it all comes down to what works best for you.

    Reply
Malik Tukur says

Hi Justin,
I very much appreciate what you posted. It is spot on for most newbies. Perhaps it’s the glitter of indicators that attracts. Not all that glitters is gold!
Thanks.

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Nsikak says

Hi Justine,
Thanks for the eye opener. Since i found your blog, my trading experience has been transformed. I cant thank you enough

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Comfort says

Yeah Justin that’s really true what you have just share with us, you may look at the chart it tells you something but when you look at the indicators tells you opposite of what the chart tells you and you end up making a wrong decision, so from today i will really remove everything and work with the chart only.Thanks a million for what you shared with us.Thats true when they say you learn from the best people.

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Farai says

Hie Justin. I have been using technical indicators and truly it has been confusing me. I believe price action will give me the results I need

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