In the forex faq today, we have a question from one of our fellow traders asking the below question.
Below is the question:
What are the few indicators that are useful for a trader who wants to stay discipline to a particular “trading system”?
First of all, I must say that I dun quite understand what you mean by stay discipline to a particular trading system as you did not elaborate more in your question.
If I were to interpret this question myself, I think that you are looking for some indicators that can help you to enter and exit your position. However even with these indicators, the key still lies in you. You are the one in control of your own trades and the discipline must come from you being able to follow your trading system completely.
Even if I tell you which indicators to use for entering and exiting your position, it still rely on you to have the discipline to stick to the indicators. I have received emails from a lot of new traders telling me how much they have lost in their trading and how eager they want to recoup back their losses.
Most of the time when I receive such emails, I will reply them asking them whether they have a reliable strategy on hands. I eventually find out that 80% of them do not have a reliable strategy to trade with. Another 20% of them do have a reliable strategy on hand but they tend to enter a trade even when the setup is not 100% like the trading system.
So what I am trying to imply here is discipline has to come from you and not from any indicators. However I want to take this opportunity to share with you a few forex indicators that can help you in the entry and exit of your trades.
1) Parabolic SAR – This indicator comes with a dot that is formed at the top or bottom of a candle. The PSAR is in fact an entry and exit indicator by itself. When you see that the dot flips from top to the bottom of a candle, it is a sign that the price is going to move up and this is an entry signal from this indicator.
Let says that you have entered a LONG trade based on this signal, you have to be cautious when you see that the dot has flipped from bottom to the top of a candle as this is an indication that the price is going to move down soon and this is sort of an exit signal.
2) Stochastic – The stochastic indicator is one indicator that is widely used by traders as it has the ability to tell whether the market is currently in an overbought or oversold zone.
If you have read some forex book, they will tend to you to enter a SHORT trade when the stochastic is in an overbought zone. They will also tell you to enter a LONG trade when the stochastic is in the oversold zone.
However from my years of experience in trading, this is not the case for most of the time. From the picture below, you can see that the price continues to move down even though the stochastic is in an oversold zone for sometime.
When you see that the stochastic is stuck to the overbought zone for sometime, what it is trying to tell you is that the market is in a strong downtrend. If you were to enter a LONG trade thinking that the price will bounce up, you are in for some trouble.
In fact, I will recommend you to enter a LONG trade when you see that the stochastic has been staying above the overbought zone for sometime and enter a SHORT trade when you see that the stochastic has been staying below the oversold zone for sometime.
In trading, you must have the confluence of signals from a few source before you enter a trade. Never ever enter a trade based on the signal from one single indicator. The more confluence of signals you have, the higher the probability that you are getting into a winning trade.
3) Fibonacci Indicator – The Fibonacci indicator is another great indicator that I will recommend you to use. This is one indicator that is commonly used among those big institutional traders and therefore you will find that the price will most of the time respect the levels that are formed by this indicator.
From my experience all these years, I find that the price usually respects the 0.382, 0.500 and 0.618 retracement levels. When the price hits the 0.500 and 0.618 retracement levels, it will most probably extends to the 1.618 extension level.
For me, the best entry will be when the price hits a Fibonacci retracement level and the entry is being confirmed by both the stochastic & PSAR indicators.
As for the discipline in trading, you must be patient and must only enter a trade when the setup is 100% according to your trading system. Never ever enter any trade that is not according to your setup.
I hope that I have answered your question and do feel free to email me again if you have any other question.