“Indicator” is one of the most important questions of novice traders. They always ask, what an indicator is and what indicators they must use, or questions like this:
- what is the best?
- what indicators is better than others?
- which indicator is more trustworthy?
If you have been following us on LuckScout.com, you know that we only use candlesticks and Bollinger Bands. Many of my friends do exactly the same, and they are among the most successful traders. There are also some articles about MACD on LuckScout:
- MACD and Its Power in Forex Trading [With Pictures]
- How To Use the Slower Settings Of MACD Indicator?
- MACD Histogram: Trading the Long Trends and Maximizing Your Profit
- MACD Divergence As a Strong Reversal Signal
In the articles, I have explained how to use the MACD to locate the trade setups through the MACD Divergence and Convergence, and the other ways that can be used to have the candlestick signals and patterns to be confirmed by MACD bars. I strongly recommend you to read the above articles carefully.
After candlesticks and Bollinger Bands, MACD and RSI are the last indicators I may want to use on my charts. I have published some articles about RSI and also using RSI and MACD at the same time:
- RSI Support and Resistance Breakout
- RSI Divergence and Convergence
- The Importance of RSI 50 Level to Confirm the Trade Setups
I know there are some articles published on LuckScout by my other friends that use some other indicators like Stochastic:
- Stochastic Oscillator: A Mechanical Indicator for All Traders
- The Safest Way to Use Stochastic Oscillator
- Stochastic, RSI and MACD Positions in a Bollinger Bands Squeeze Breakout
- How to Read Stochastic Oscillator Properly
- Stochastic Oscillator Settings for Forex Trading
They believe on those indicators and use them successfully, but from my point of view, it is not necessary to have them on the charts. Of course, please consider that my trading style is different from those friends.
I believe my trading method is much simpler and easier.
I like to simplify everything and lower the complications and stress as much as possible. I have been like this in everything, from business to personal life. I love simplicity and ease.
I want to help you have the same simplicity in your trading, because it has worked for me so far, and I am sure it will work for you too. This simplicity is one of the things you need to become profitable (if you are not already profitable of course). If you are profitable already and you are happy with your trading system, then there is no point to change anything. But I am sure most of this website’s visitors are still on the way to become profitable. So my ideas work for them.
Why Do I Love the Japanese Candlesticks?
Good question. When you want to buy/sell and make money, your information has to be accurate. Out-dated and inaccurate information cause you to make mistakes and lose money. For example, when you want to invest in the real estate market, you have to know about prices in different cities and areas. You have to know whether most people want to buy, or they prefer to sell the properties they have. You must analyze the real estate activities of each area during the past few years. You need a lot more information like this to decide. Although real estate market is great to make money, some people lose in this market because they invest without accurate information.
It is the same with other businesses, and stock and currency trading.
Candlesticks are the most accurate and real time indicators. Line chart just show you the close price which is not important for us at all. Who cares if the EUR/USD price is 1.4000 or 1.6000? What we do care about is that whether price is going to go up or down. This is what we have to know to trade.
Traders are the building units of each market. When most of them buy, the price goes up. When most of them sell, the price goes down. What makes them decide to buy or sell is not important for us. Whether most of them will buy or sell is the most important thing for us, because it tells us whether we should buy or sell to make money.
Candlesticks tell me whether most of the traders want to buy or sell. It is not only that. They inform very fast and without any delay, so that I can be on time enough to enter the markets.
Here is just one good example for this article:
On 2014.05.08 a strong bearish engulfing pattern formed on EUR/USD daily chart (the red arrow) while the market has been mainly bullish for such a long time. The 2014.05.08 candlestick’s upper shadow and its big and strong bearish body, plus the strong Bollinger Upper Band breakout, told me that “most traders have decided to sell, and more sellers will join them during the next days”:
So I went short when the 2014.05.08 closed and the next candle opened. Look what happened after that:
What other indicator could give me such an accurate signal?
No indicator!
Read these articles carefully:
- Candlestick Trading – The Language of Japanese Candlesticks
- Which Candlestick Patterns Are the Best and Most Reliable to Trade?
- Good Examples of the Strong Candlestick Patterns
- Piercing Line Pattern: A Strong Candlestick Buy Signal
- Bearish Engulfing Candlestick Pattern As a Strong Sell Signal
- Candlestick Shadows Explained
Why Do I Use Bollinger Bands?
Bollinger Bands is a great indicator that compliments the candlesticks signals and patterns:
- Bollinger Bands in Forex and Stock Trading [With Detailed Pictures]
- Bollinger Bands Squeeze: What Is It and How to Trade It?
- Bollinger Bands Squeeze Trading Strategy
We can still trade properly using the candlesticks and without having Bollinger Bands on our charts, but I prefer to have this indicator on my charts for several reasons:
1. The Bollinger Bands Breakout:
Having a Bollinger upper or lower band breakout is a great help to know whether the candlestick pattern I locate is strong enough or not. When there is a strong breakout, then I take the signal with more confidence and peace of mind. When there is no breakout, or there is a weak breakout, I will think more, and in most cases I ignore the trade setup. We have already given too many examples.
2. Bollinger Bands Angle:
Sometimes the breakout is strong but the band is going up or down sharply. This warns me not to take the trade and go against the direction of the trend. Here is an example:
As you see there is a strong upper band breakout, but trend is too sharp and it is risky to go against the trend.
3. Bollinger Middle Band:
Bollinger Middle Band is good for taking the continuation trade setups when there is a good and strong trend.
4. Bollinger Bands Squeeze:
Bollinger Bands Squeeze is a great chart pattern that precedes the strong movements. It is an early pattern that tells you a big movement is on the way after the squeeze breakout:
- Bollinger Bands Squeeze: What Is It and How to Trade It?
- Bollinger Bands Squeeze Trading Strategy
- Forming Bollinger Bands Squeeze on GBP/USD Daily Chart
MACD:
If I wanted to have another indicator on my charts, that would be MACD or RSI or both. I have already explained it here. However, let’s add it to the above charts and see how the 2014.05.08 trade setup and then the one that I just exemplified above (regarding the Bollinger Bands angle) will look like having MACD on the chart:
#1 is the same strong bearish engulfing we already talked about it above, formed by the 2014.05.08 candlestick. According to this article, MACD bars also confirmed the trade setup. Please note that when the candlestick pattern and BB breakout are really strong, I do not care about anything else. I mean even if I had the MACD on the chart and it was against the 2014.05.08 candlestick pattern, I would not care.
#2 is the same example I showed you above regarding the angle of the Bollinger Bands. As you see, MACD bars also do not confirm the short trade setup. They are going up strongly and are saying that we should not go short.
It means MACD is a good indicator too. It is great to confirm the trade setups. However, it is not a must to have it on the charts if you know what candlestick patterns to pick.
RSI Is Also a Good Indicator:
I will have some good articles about RSI:
- RSI Support and Resistance Breakout
- RSI Divergence and Convergence
- The Importance of RSI 50 Level to Confirm the Trade Setups
- RSI as a Great Overbought Oversold Indicator
Below, I am just showing you some examples to tell you that RSI also forms divergence and convergence. Like MACD, RSI divergence and convergence are good reversal patterns. In most cases, when you have both indicators on the charts, they both show the divergence or convergence at the same time.
This is an example of RSI divergence which is not confirmed by MACD:
In addition to this, RSI has something that the other indicators don’t. It forms support and resistance lines that their breakout is an early signal of the support and resistance breakout on the price. I will explain about this in a different article.
So, RSI is a good indicator too, but not as good as MACD. I don’t have any of them on my charts (neither MACD nor RSI), because as I said it is not necessary to consult these indicators when you know what candlestick patterns to wait for.
What About the Other Indicators?
The only thing I can say is that you’d better to forget about them. Stochastic is the most famous and popular indicator, after MACD, RSI and Bollinger Bands. I believe it is nothing but a money sucker, unless you really master how to use it. It is terrible for taking the reversal patterns. Price still can keep on going up or down for too many candlesticks, even when Stochastic reaches the overbought or oversold area. You will learn this when your stop loss is triggered.
Moving Averages are also useless. The only moving average that works is the Bollinger Middle Band which is a 20 simple moving average. The other moving averages don’t work.
There are so many other indicators like Parabolic SAR, ZigZag, Fractals, CCI, and… .
Anybody can create an indicator. All of the indicators are calculated from the price, through some special formulas. Only a few of them that I explained above can help us. The rest just plot some lines or points on the charts. Many of them redraw or repaint.
We’d better to forget about them if we want to trade currencies for a living. Those who just want to speculate and have fun, they can spend their time on these indicators to see how they work.
