Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets

CHAPTER 10

The Ultimate Indicator

People often ask, what is the best indicator to use in forex trading? Is it the relative strength index (RSI), or exponential moving averages (EMAs), or perhaps Bollinger bands? Or is it something more esoteric? New indicators are being created every day, as market technicians attempt to leave their mark on the trading world. What is the ultimate forex indicator?

Well, there is one indicator that stands above the rest, and that indicator is the price. The price has been and always will be the ultimate indicator. Most indicators are simply an equation or formula that is applied to the price.

THE PRICE IS THE KEY

A moving average is a good example, as it consists of the average, or mean, price of a trading vehicle over a designated period of time. Oscillators such as stochastic or RSI (see Figure 10.1) measure the difference between the current price and recent prices, to determine if a currency pair (or stock, or commodity) is overbought or oversold. Eventually, every indicator boils down to the price.

Technically speaking, in the forex market we do not have a price per se. Instead, we have an exchange rate, which allows us to compare two currencies in one equation. Many times throughout the course of this book, you will notice references to the “price.” In currency trading, the word price is simply slang for “exchange rate.” This is especially true for those of us who formerly traded stocks, and are in the habit of referring to the numbers ...