Indicator-based Trading is a trading method that uses technical analysis indicators to help identify market tendencies.
What is indicator-based trading?
An indicator manipulates the price data by using a mathematical formula. Some traders prefer technical analysis indicators. They believe they can accurately predict market movements and future direction.
Indicator-based trades rely on indicators to analyze prices and provide trade signals. Numerous indicators give traders a trade signal that signals them when it’s time to trade. This can be simpler than learning how to read price chart.
Traders don’t have to know how to recognize a trend in the price chart. They need to be able to identify an indicator that will help them determine trends and reversals.
Forex trading indicators for beginners: How indicator-based trading works
The indicator is a visual representation that shows the mathematical formula as well as price inputs. A skilled trader or chart reader will often see only what is visible by simply analyzing the volume (or price) chart without any indicators.
Types of trading strategies that use an indicator
There are thousands upon thousands of indicators. New ones are created every day. Trading methods that involve indicators can be combined and used in different ways. Here are some common types of indicators strategies:
Crossover Strategy
This occurs when one indicator or price crosses paths. One of the easiest indicator strategies is price crossing a moving average.
Another alternative to the price-crossover strategy involves a crossing of a shorter-term moving mean with a long-term moving mean. This is called a “moving average crossover”.
Crossovers can occur in many indicators. The MACD is an indicator that provides crossover signals when the MACD lines crosses the signal line.
Crossover signals include RSI moves above 70 or80 and then back down below. These signals indicate that an overbought scenario may be advancing with a pullback. Similar to the above, a drop below 20-30 followed by a rally higher than 20-30 could indicate that there is a pullback.
Uptrends and downtrends
Many indicators are used to confirm the trader’s view. If a trader notices an uptrend in the price chart, indicators like the RSI, MACD and moving averages (as with many other indicators), help to assess the strength. They also help confirm downtrends and reversals.
These examples are not intended to be recommendations but strategies. Each trader has to find the right indicators and earn a profit. Many strategies don’t make a profit, despite being well-known.
Advantages of trading with an indicator
Indicators have the main benefit of simplifying price moves. An indicator’s simple movements may be more intuitive for novice traders than the complicated gyrations in a price chart. It is important to note that easier doesn’t necessarily mean more profitable. Indicators can be used to identify weakness and strength in the price, such as when a trend has weakened.
It may seem difficult for new traders to discern subtle changes on a chart. But, using indicators and other tools, they can be made aware of subtle changes on the price charts that they are not trained to see.
Trading with an Indicator Based Onput Limits
The indicator is a visual representation that shows the mathematical formula as well as price inputs. A skilled trader or chart reader will often see only what is visible by simply analyzing the volume (or price) chart without any indicators.
Indicators are not easy to use. Most traders don’t understand what is happening “under the hood”. The indicator doesn’t always provide the best signals.
Every indicator has weaknesses. It could provide trade signals at an inappropriate time or not provide trade signals at all. You should study the math behind any indicator. You can then identify any weaknesses. Don’t look only at the times when the indicator advised you to do something. Take a look at instances where the indicator failed you to warn you about trading or exiting a trade.
The downside to indicators is that they often show what is happening on the chart but in a different way. The price action traders believe indicators are unnecessary and not necessary because they can only give information that the volume (and price charts) already provide. Indicators are calculated using volume (or both) and tend to follow the price.
These are the Key Takeaways
To spot trends in the market, new traders can use indicator-based trading. This is based on visual signals.
These are not as helpful for traders who understand how to read price chart.
It’s impossible to predict exactly what is going to happen with indicators.
You should exercise caution, especially for a beginner trader.
