October 18, 2007

Can You Be A Successful Forex Trader Trading Just One Indicator Only?

In a quiet moment last weekend I was wondering if you could trade forex full-time just using one technical indicator.

My conclusion was that it would be extremely difficult, if not impossible, to make consistent profits, but then I remembered back to when I first started trading forex a few years ago, and realizing that back then I pretty much only used one indicator - the Exponential Moving Average / EMA (15), and did make consistent profits.

Technically speaking I didn't use only one indicator as I also displayed the EMA (50) and EMA (100) on the same chart to help me decide on exit strategies, and nowadays I use a lot more indicators to confirm my positions, but nevertheless I still think this basic approach of using an EMA (15) on a 30-minute chart could still generate regular profits.

The trick is to look for currencies that have been trending strongly in one direction for a few days with a rising or falling EMA (15), and wait until this EMA changes direction and signals a reversal.

Furthermore when this EMA does change direction you ideally want to enter into a position when the price is close to or touching this EMA for maximum value. Place stops about 20 or 25 points below this EMA in the rare instances where you get a false reversal, but in most cases the reversal will happen and you can potentially make 30-200 pips depending on the strength and momentum of the reversal.

Also, you ideally want to trade in the direction of the long-term trend, so let's take a real-life example – the GBP/USD.

The long-term yearly trend has been upwards so we ideally want to find positions where the EMA (15) has been heading downwards for a few days and watch for a change in direction, so we're trading in the direction of the long-term trend.

If you look at a 30 minute chart of this pair for this month (October), you can see three obvious instances of this happening.

The first instance was between 3/10 and 4/10 when the price fell from 2.0440 to 2.0280 before bouncing back and heading upwards again. The EMA (15) started heading upwards as well between 2.0310 and 2.0320 and there were plenty of opportunities to trade close to this EMA to get maximum value (sometimes the price blasts through the EMA without retracing, making it hard to get any value from the trade).

As you can see, this upwards trend continued until the price reached a peak of 2.4030 so you could potentially have made a profit of 100+ pips, but even if you'd held out until the EMA (15) started heading downwards which was confirmed around about the 2.3080 mark on 5/10, you could still have netted about 70 pips profit.

Similar set-ups occurred on 9/10 when there was another 100+ point reversal, and on 12/10 when there was a slightly smaller move, so as you can see there are always good opportunities to trade this one indicator alone and make pretty good profits.

Therefore to answer my original question yes I believe you can make regular profits trading just one indicator, because I myself have done so in the past, but it makes far more sense to use additional indicators as well to confirm your positions, and to find additional positions to take.

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3 Comments on Can You Be A Successful Forex Trader Trading Just One Indicator Only? »

October 26, 2007

tonyrich @ 12:41 am:

Simple answer to this is no and a big no. The best ma I know is 200 ma used a lot but if you only follow one indicator, it might work in the long run but in the short run you will get ulcers. However having said all that, it's actually two indicators we trade, buy or sell. Use your mind. The only indicator you will ever need.

December 23, 2008

Jason @ 4:37 pm:

I want to point out a different view: Many of the best traders trade with NO indicators. For 5 years, I wasn't consistently profitable until I got rid of all the indicators. Besides; MACD, RSI, CCI, Stochastics, TRIX are all momentum indicators. If set with the right parameters they will be nearly identical, because they ARE nearly identical. The only reason they appear different on most charts is that they are usually calculated with different settings: MACD long, RSI medium & stochastic very fast.
Then there's the old argument that all indicators are just manipulations of price anyway. Indicators take price, remove information, then report after price has completed telling its story. In that sense, indicators only tell you a summary of what has happened for the select lookback period after it is complete. Only price itself can tell you what is happening right now. The most profitable traders trade primarily based on price action, not indicators.
This isn't to say that systems trading based on indicators is wrong or not profitable. But those that do need to realize that traders who use pure price action alone may have an edge over the systems traders.

I don't want to imply that one method is right and the other wrong. That would be like saying physicians are good and nurses are bad. Each have their strengths and weaknesses. Both can be a satisfying profitable career. They just need to be aware of their own strengths and limitations. One key difference is that the markets are brutal. It would be as if nurses and doctors could only make money by taking it from each other. That changes everything. That's trading.

August 18, 2010

Vytas @ 5:53 pm:

Well, this is not my first visit to the website. I have seen that there has been done such a great work here. Lots of articles, education training. I appreciate your work a lot. Keep on doing what you are doing.
As far as one indicator question is concerned, I think it is possible to trade using only one indicator, but that would not be ema's or macd, or even rsi. I think support and resistance is the one indicator that can substitute all the rest. It is very strong, accurate and reliable. But one has to know how to use it. Have some filters and so on. That is my opinion about possibility of successful trading using only one indicator. Thanks again.

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