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Most Forex trading systems today use at least one custom technical indicator to determine its buying or selling criteria, and people flock to purchase these systems without carefully thinking about what those indicators really mean.
Here’s an example of what a typical trading system will tell you: “Buy when moving average X crosses moving average Y from below”.
Typical trading systems basically tell you to “buy” or “sell” when a set of indicators show a certain behavior… and that’s a very common mistake that causes you to lose money.
Now don’t get me wrong, there are indeed many successful trading systems that use custom indicators to produce very good trading results. However, there is a danger of misinterpreting the usefulness of technical indicators when using them.
All Trading Indicators Are Based On PAST Events
This might seem like a blatantly obvious fact, but you’d be surprised at how many people forget this in their everyday trading routine.
Custom indicators only serve as a guide to help with your analysis of the market… and yet many traders rely totally on them to enter into trades.
You’ll need to understand that all trading indicators - no exception - are merely a reflection of market movements that happened in the past. They are a history book. And that’s all they are. Winning traders realize this, and most losing traders don’t.
But!
That’s not to say that trading indicators are useless… they do have their place in helping you make money, sure. The trick is to know how to use them in the right way. Simply relying on trading indicators alone to trade is a big mistake. And it could be a very expensive mistake too!
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