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Technical Analysis uses historical prices to identify trends and support and resistance levels. Technical indicators are derived from mathematical algorithms that use historical data to provide a current value. Most are therefore by definition lagging.
Some of the popular lagging indicators include moving averages and MACD. If you are a short term trader, these types of indicators will most likely be useless to you as their signals tend to be very late. By the time a moving average crossover occurs for example, a significant portion of the price move has already occurred.
On the other hand we have the so called “leading” indicators. Leading indicators as implied in the name are designed to lead price movements. Most of the popular ones that we know of at the moment represent some form of price momentum over a fixed look-back period. This is the number of periods used to calculate the indicator. For example, a 20-day Stochastic Oscillator would use the past 20 days of price action in its calculation and all prior price action should be ignored.
Some of the more popular leading indicators include Commodity Channel Index (CCI), Momentum, Relative Strength Index (RSI), Stochastic Oscillator and Williams %R.
One of the biggest problems short-term day traders face when using these “standard” leading indicators is that their predictive power in non-trending market conditions is largely negated. For example, when looking at the Relative Strength Index (RSI) would it be safe to buy when the indicator is oversold or sell when it is overbought? Or would a Momentum indicator tell us where price is going next? Most likely it wouldn’t.
For currency traders it gets even worse. The predictive power of these standard leading indicators is even further negated because of the persistent external news events that cause radical price moves in relation to the most recent moves. Furthermore, most of these indicators were developed for use in stock market trading decades ago. They were developed in a context where real time information didn’t exist. For currency traders, real time information is the norm.
If you’re a day trader, you might be asking what technical indicators should I be using then?
A small software company from the United States has developed a day trading software for traders called Wave 59. Wave 59 is built exclusively by traders, for traders. It contains many unique trading tools and advanced technical indicators designed for the modern day trader willing to look at markets in a slightly different way. The software is free to try for a 30 day evaluation period on the Wave 59 website.
Some of the more interesting tools and advanced technical indicators on offer to day traders are:
Geometric Patterns – Geometric patterns are supposed to exploit the relationship between the price and time axis. Unless you have been working with Gann techniques, chances are you don’t realize the potential of geometric patterns. They are real and are appear often in any market. If you find a good one, it could give you a bigger trading edge than any RSI or moving average calculation.
The Fibonacci Vortex – a very unique support and resistance tool. It is the geometric pattern behind the majority of price swings found in all traded markets. You simply place it on your chart, line it up against recent price action and watch as the market bounces off predetermined turning points in both time and price.
Time and Price Patterns – Generally, with similar types of trading software that try to identify repeating patterns in a chart, the user has no influence on the type of patterns the applications recognize as they are usually pre programmed. By contrast, Wave59 provides you with a simple to use pattern builder allowing the creation and definition of customized patterns which can be inserted in the chart or the program can search for a similar pattern in prices.
The Wave59 software also contains many improved versions of popular trading techniques.
For example, their “Fractal Trend Index” resembles the behavior of the better known ADX indicator. The “Ultra Smooth Momentum” curve is like many of the more widely used momentum curves but without the noise. These two tools are examples of improved algorithms and should in theory outperform the popular versions of these standard indicators as they are calculated using an enhanced mathematical formula.