When it comes to trading forex, traders can be primarily grouped into two categories. Ones who trade with indicators and the other who trade price action.
While both types of trading methods have their own pros and cons, this article is not about which is better, but only to point out the advantages and disadvantages posed by both the two trading methods.
Technical Trading Indicators- Brief Introduction
Trading indicators is usually how a trader tends to start off on their forex journey, and in all likelihood, start with moving averages. When it comes to trading with indicators, the general principle being that the trader takes signals off the indicators.
Within this group of indicators, there are two types of indicators, leading and lagging indicators, which is obvious by its name.
The leading indicators basically give a visual representation of prices in the market (ex: PSAR) whereas lagging indicators are plotted based on the most recent closed data (candles).
Advantages of trading with technical indicators
- Easy to understand and use, thus highly popular, especially with new traders
- Allows to build limitless trading systems/methodologies
- The most commonly used trading indicators include Moving Averages, MACD and oscillators such as RSI, Stochastics and CCI
- Works on any time frame
- A combination of trend and momentum indicators can be used to build a robust trading system
- If rules are followed, indicators can provide a great trading system that can give consistent trade signals
Technical Indicators Disadvantages
- Lagging indicators are usually late when it comes to trade entry and in most cases, price has already moved significantly
- Leading indicators are prone to re-paint thus an entry would be risky
- Most traders tend to use redundant indicators (the same kind of indicators). Ex; use both RSI and Stochastics, which are basically oscillators and measure the same over bought and oversold levels
- Traders tend to give in to emotions and sooner than later start to disobey the rules. In other words, traders tend to enter or exit a trade a bit too early
Price Action Trading Brief Introduction
Price action trading is the pure form of trading using the most minimal of indicators. Some commonly used price action tools include support and resistance, candlestick patterns, Fibonacci, Andrews Pitchfork and so on.
Most experienced traders usually prefer price action as it leaves their charts uncluttered thus allowing them to make better trading decisions. However, for a beginner, price action trading can be tricky, to say the least.
Advantages of trading with price action
- Highly profitable and reliable trading methods can be built off price action
- Trading is based on the actual price movements being formed thus providing accurate entry/exit signals
- Higher the time frame, better the chances of maximizing profits and thus increasing the overall equity growth
- When used in combination with fundamental analysis, price action can be quite powerful
- Beginners to price action trading can take help of indicators to confirm their trade judgment
Price Action Disadvantages
- Complicated for beginners. Basics such as candlestick patterns and using them in context can often lead a trader to false/losing trades
- Known to work best on H1 and higher time frames, thus patience is highly essential
- Often subjective, thus making it hard initially. Requires lot of practice to become familiar with how price reacts in certain situations
Technical Indicators V/s Price Action
As obvious from the above comparisons, both types of trading methods have their own pros and cons. If you look a bit under the hood, one will find that both technical indicators as well as price action based trading strategies tend to perform equally well.
However, the most important common basics to both approach is money management, which is perhaps the most important aspect that can determine a traders longevity when it comes to being successful in forex.
There is no right way and wrong way when it comes to trading. There are successful traders who use leading and lagging indicators and there are successful traders who trade purely off price action.
The most important point to remember is which of the two types fits your trading style and personality.