Just like gold prospectors of old, every trader suspects that someone out there has the “secret”, the indicator beyond all indicators that will always give infallible signals and lead him to his vein of gold. Does such a “Holy Grail” exist? Or, is this just fanciful thinking that a panacea is waiting to be found to cure our worst paranoiac fears? The best answer to these plaguing questions is, as with the prospectors of yore, we are still “panning” for it.
A cursory search of “forex indicators” on the Internet reveals that there is definitely a search going on out there. One list had over 275 different indicators organized alphabetically with separate articles on a majority of them. Even the popular Metatrader 4 platform has over 50 indicators to choose from, and if you wish to tap into the custom programming market for this widely used terminal software, you would find thousands more indicators available, each of which obviously pleased at least one trader who defined the necessary instructions for an IT professional.
The evolution of technical analysis
The evolution of technical analysis has been in overdrive ever since access to heavy computing power and data management software flourished in the 1980’s and 90’s. As with prospecting for precious metals, the latest techniques must sift through a multitude of debris to find the smallest grains of reward, but every “find” confirms the process and the possibility that further “finds” are nearby. As technology moves ahead on all fronts, the latest discoveries in other disciplines provide further opportunities for discovery in our world of currency trading.
Technical analysis has its historical roots in commodity trading, some actually say centuries ago as a matter of fact. Traders felt that commodity price behavior represented a balance between supply and demand factors as caused by traders’ reactions to economic, political or psychological changes. Observations of the seasonality of crops led to the notion that historical trends repeat in market situations. The physics of wave theory and oscillating springs suggested that market forces must gyrate to find equilibrium, thereby generating measurable patterns, until the next new force disrupts the steady-state system.
The basis for early chart analysis
Three factors then combined to form the basis for early chart analysis: that price was the ultimate measure of all supply and demand forces, that market price behavior tends to be repetitious, and that markets tend to move in trends. Since that early crystallization of observations and ideas, the search has been energetic and continuous, driven by the desire to find the best indicators possible to secure a competitive edge in predicting future price behavior. “Random Walk” theorists have attempted without success to debunk the search effort as pointless, but the preponderance of valid trading signals and their associated profits have reduced the debate to background noise.
From basic chart analysis to oscillators
Basic chart analysis evolved quickly and moved to the realm of stock markets, where timeframes and choices were broadened. It seemed that every mathematician believed that the fruit of his analytical regimen was to be found on Wall Street. Basic trend lines and percentage retracements gave way to trend reversal and continuation patterns and a host of new charting techniques. Oscillation theory studies then yielded the various indicators that are familiar to us today.
Oscillators were designed to signal when markets were in an “oversold” or “overbought” condition, thereby providing optimum timing for various buy and sell transactions. A casual review of the well-known indicators reveals a rich history, filled with the names of their respective creators and the thought processes that led to each discovery. George Lane created Stochastics; Gerald Appel, MACD; Welles Wilder, the RSI and Parabolic SAR; and, John Bollinger, his Bands. Some creators have their names attached to an entire field of study, as with W.D. Gann Analysis or Elliot Wave Theory.
The evolution of technical analysis continues to this day. Each new advance in computing technology renews the challenge to find the “Holy Grail” once again. However, the shear number of choices in the market would require an inordinate amount of time, time taken away from planning and trading, to test each one. And, we have not even discussed the parameter settings for each indicator. Since much of the recent development and refinement of indicators has been focused on the stock market, additional fine-tuning is required to adapt the various charting tools to a day-trading environment. The actual effectiveness of a specific indicator may well rest with the selection of proper parameter settings and not with the indicator itself.
What do most traders think?
The general consensus is that no “Holy Grail” exists today. If it did, everyone would be using it. The most popular indicators have stood the test of time and have their devoted followers. However, some indicators are better in “trending” markets, while others are better in “ranging” markets. Some traders swear that a combination is the only way to go to eliminate “noise” and the tendency of each to give false-positive signals from time to time. Others suggest that you must keep things simple or “analysis paralysis” will stop your trading rhythm in its tracks.
Although we may wish that a “perfect tool” were out there, this desire actually harkens back to an argument used by critics of technical analysis in the first place. That argument suggests that chartists create self-fulfilling prophecies when they interpret specific patterns or trends. Perhaps, this argument might have held water before the advent of personal computing power, but indicators today are far removed from artificial conjuring by ego-driven minds.
Technical analysis works on a consistent basis
However, the jury has spoken. Technical analysis works on a consistent basis, and that is the chief objective of any trader, to achieve a consistency in trading results such that the “net” of all trades increases in the positive direction. The beauty of a specific indicator or combination thereof rests with the individual trader and his personal parameter settings. Unfortunately, there are no shortcuts for experience or for honing your artistic talent when employing the tools of your trading craft. Such is Life.