Six Common Mistakes To Use Forex Charts

Forex charts are useful tools for a successful forex trading strategy. However if used incorrectly, they can also provide misleading information. Most novice traders tend to make the following six common mistakes when using forex charts:

1. Using Useless Indicators

These are indicators based upon flawed logic. Fibonacci numbers, Elliot wave theory and cycles are two prime examples. They are both loved by some in the investment community yet it’s difficult to understand how they are used to explain the volatility of the market.

Well if markets were scientific there would be no market as we would all know the price in advance. Uncertainty and speculations are what cause prices to move.

Fibonacci numbers were devised to solve a scientific problem and has nothing to do with forex trading.

Elliot never made any money trading (despite what his fans say) and cycles well – look at a chart and see if you can spot repetitive ones.

2. Using Indicators With No Valid Data

Forex charts do not apply well in day trading! If you want to use forex charts to make money you need reliable data and in a day or a few hours it’s not – volatility can and does take prices anywhere, so its impossible to win no matter how good your indicators are.

3. Using Lagging Indicators To Lead

Most obvious error here is buying dips to moving averages. Lesson is to never use a lagging indicator to enter trades you are relying on hope you need to use momentum indicators!

4. Not Using Momentum Indicators

Momentum indicator calculates the value of the commodity price shifts during a definite period of time. In forex trading, momentum is used as a leading indicator.

If you are using forex charts you need to enter with price momentum on your side and this is why they’re so important.

Two great ways for timing entry on your forex charts are stocastics and Relative Strength Index (RSI). RSI identifies overbought and oversold conditions in the market. It’s a very popular tool to confirm trend formations that helps you identify momentum.

5. Using Too Many Indicators or Rules

In forex trading, this causes disaster for any forex trading system.

Less trading rules will lead to a more robust trading system in the face of brutal market conditions.

Many top traders argue that you should minimize the number of indicators that you use, simply because the more

you use, the more you will get conflicting information, and confusion and uncertainty does not equate to profits. This is why so many top traders recommend using just a few tried and tested indicators that suit your trading style.

6. The Dangers of Curve Fitting

Why is it so many back tested systems fail in real time currency trading?
The answer is curve fitting – where the system is bent to fit the data.

Most forex trading systems are curve fitted on past data. They often contains many rules and parameters that are used to govern past market conditions.

Of course no two periods of trading history are exactly the same and that’s why a curve fitted system fails in real time trading.

These are six common mistakes that you should avoid to have any success in forex trading.

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