Technical Indicators

Technical indicators are the basic tools of technical analysis. They distill market movement so you don't have to deal with a lot of the static that comes with erratic price movements. There are literally thousands of technical indicators available to you as an investor. In fact, we even created one of our own called the Forex Forecast—a proprietary forecasting indicator that is available only through iNVESTools at www.investoolsct.com. There is also an iteration of this forecasting indicator on www.investools.com that is used for investing in the stock market. But when it comes right down to it, most Forex investors stick to a repertoire of fewer than 20. Our goal is not to overwhelm you with thousands of technical indicators that you will have to weed through. We want to keep this as simple as possible because it is much easier to be profitable when you don't clutter things up too much.

Often you will see technical indicators classified into two categories: trending and nontrending (or oscillating). Practitioners divide technical indicators into these two categories because the trading signals produced by trending indicators are generally supposed to be more profitable during trending markets, and the trading signals generated by nontrending, or oscillating, indicators are supposed to be more profitable during nontrending, or flat, markets. While that is a nice way to conceptualize these indicators, most indicators usually perform best during trending markets. Fortunately for us, the Forex market usually has a lot of strong trends to take advantage of. We are trend traders, and our strategies are trend-trading strategies so we tend to look at technical indicators a little differently. Technical analysis for us is a two-step process. First, we identify the current trend. Next, we sit back and wait until the market tells us it is a good time to jump in and take advantage of the current trend.

The trend is the single most important piece of technical information you can have. Once you are able to identify the trend of the market, you are three-quarters of the way to a successful trade. When you trade with the rest of the market, you exponentially increase your chance of success. Let's look at the performance of the U.S. stock market for the past decade to see how this works. If you bought stocks or mutual funds from 1995 to 2000, you probably made a lot of money. It doesn't really matter which stock or mutual fund you bought because virtually all of them were going up. All you had to do once you believed the stock market was going up was toss your money into an account. After that, you were set. Month after month the statements would roll in telling you how much money you had made and how much earlier you could now retire. Everybody looked really smart because everybody was choosing winning investments. But our success wasn't based on our genius; it was based on the trend. The trend in the market was going up, and everyone just rode the wave higher.

All that changed in 2000 when the market turned around and lost huge amounts of money. Investors were certainly no less intelligent than they had been during the years of the mammoth uptrend, yet they were still losing money. We all kept buying more and more shares, but the value of our shares never seemed to go any higher. Most investors were baffled and ended up losing quite a bit of their money. So what happened? Well, the trend reversed and started going down instead of up. Now, there were certainly a great number of fundamental factors that affected the reversal of the trend, but all we care about in technical analysis is that the trend reversed. The point we want to make sure we drive home is that you should always stick with the trend. Are there investors who make money betting against the trend? Yes, there are. The more appropriate question is, Are there many investors who make money betting against the trend? No, there are not. Why would you struggle and fight to swim upstream when you can enjoy life so much more by swimming with the current?

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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