Attempting to trade forex with too much information can be as harmful as attempting to trade without enough. Smart traders learn exactly what tools they need and get rid of the rest. Let us show you how.
Information is good when it comes to forex trading, right? The answer is, yes — but only up to a point.
The more indicators you have, the more signals for buying and selling you receive. This sounds good in theory but when you have too many signals coming in, the results can be overwhelming. For instance, some may tell you to buy, but at the same time, others warn you about an “overbought” market condition. Having too many indicators can lead to needlessly conflicting information, thus confusing you.
The solution? Remove tools that you don’t use.
In trading, there will always be cognitive dissonance. Bullish and bearish trading signals coexist every single moment and you never for sure exactly which signal to follow. With this in mind, it is best for you to simplify your decision-making process. The easiest way to go about it is to identify and recognize the function of each tool, and why you choose to include it in your workspace.
Every tool (indicator, chart) helps to:
If you are a trend-following position trader — ie, you are someone who places trades for the long term — active trends and decent entry points are important to you while the rate of intraday change in prices may drop out of your list of priorities. Your tools in this case may be reduced to two moving averages (fast and slow) for the identification of the trend direction and the candlestick formation for entry.
If you are a momentum trader, you may not need to know where the long term trend is headed—your money is earned when the market breaks out from narrow consolidation areas. In this case, you need to know the current level of volatility—in case it drops to new lows, you can expect the market to break soon.
Your tools in this case are the price chart (for identifying consolidation) and Average True Range indicator (for measuring volatility). Candlestick formations are not necessary in this case because the market breaks quickly without showing any candlestick patterns on the way.
If you are trading in a range-bound market, you need to know possible trade locations for reversal. For this, you need the Envelopes or Bollinger Bands. Once the price comes to the lower or upper band of the indicator, you can monitor for specific candlestick reversal patterns.
Please note that the above scenarios are just examples. You may use different tools for your trade; the key here is to know why you use certain tools and what you want to achieve. Knowing the answers to these questions can simplify your trading.
When it comes to trading, having too much information can be as harmful as not having enough. You should figure which tools help you and which don’t, and get rid of the latter.
Create a list of all your current analytical tools and try to state the purpose of each in two to three sentences. Doing so helps you realize which tools are important in your decision-making process and helps in reducing cognitive dissonance.
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