Forex Leading Indicators Explained
In one of my previous post, I have talked about forex lagging indicators and how you can put them to great use in your trade.
In this post, I will be going through with you another group of indicators known as leading indicators. From the name itself, you roughly will know what they are.
Basically, the oscillators are known as leading indicators. This is because they are designed to give you a signal when the market is going to reverse.
Examples of Leading Indicators:
For the stochastic and RSI, they are built with the ability to signal to you whether the market is overbought or oversold.
If you are in an uptrend and you see the stochastic or the RSI reaching the overbought zone and started to curve down, there is a high chance that the market is either going to reverse or at the very least retrace.
If you are in a downtrend and you see both the oscillators reaching the oversold zone and started to curve upward. You should be looking out for a reversal or a retracement.
As for the parabolic SAR, it will not be showing you whether the market is overbought or oversold. It is designed to signal you whether the market has changed its trend by placing a dot below or above the candles.
However these indicators do have their problem as well. They tends to produce false signals and this is what usually cost traders to lost money.
Here is how you should make use of these indicators
Step 1: Setup at least all of these indicators on your chart
Step 2: Wait for a confluence of signals between RSI and Stochastic
Step 3: Alway wait for PSAR to flip to the other side before you enter any trade
Step 4: Check for reversal candlestick pattern. With the help of a reversal candle pattern, there is a higher chance that the market will reverse and thus save you from possible false signal
Let’s take a look at the example below
a) Take a look at the Green arrow
For the part with the green arrow, you can see that the stochastic and RSI went oversold but there is no PSAR flip. Therefore you should not enter any trade.
b) Take a look at the Blue arrow
For the part with the blue arrow, you can see that both the stochastic and RSI went oversold again but this time the PSAR also flips to the other side. In addition, you can see the formation of spinning bottom and inverted hammer which is a sign of reversal. Therefore it is okay for you to enter a LONG trade.
c) Take a look at the Red arrow
For this part, it is to demonstrate to you that this strategy do not work 100% of the time. Do note that there is no strategy that can win 100% of the time and losing is simply part of the game.
You can see that the market went oversold again for both the indicators and the PSAR also flip. However the price comes back to stop us out after a few candles.
Therefore you have to rely on high risk reward ratio in order to profit from this strategy.
Personally I do not place any trade if all the 4 above do not aligned as I always believe that no trade is better than losing trade.