Home Forex Technical Analysis Forex Indicators Guide to Selecting Custom Forex Trading Indicators

Guide to Selecting Custom Forex Trading Indicators

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How should you use custom forex trading indicators and should you buy them?

One of the greatest gifts modern technology has bestowed upon us as technical traders is the ability it has given us to shape, hone, and personalize our trading experience. The seemingly unstoppable march of technology has given us the ability to craft for ourselves bespoke strategies, charts, and indicators in order to optimize our market experience to fit our needs.

Why Custom Indicators?

If you are a technical forex trader, why should you use indicators when trading? There are really two answers to this and neither of them will come as any big surprise to any of you. The first one is simple, to give you an edge in terms of the timing of your trades and the precision with which you take advantage of that timing. The second reason is that forex trading, even technical trading, is as much an individual process – trying not to say art, here – as it is a scientifically or mathematically founded methodology. Even if you are a very technically driven trader, you will want to adapt your trading strategy to your own personal needs, goals, and ways of doing things. Inevitably, one of the outcomes of this is that you will need to build up, over time, a personalized system that relies on, among other things, a set of trading indicators that you have finely tailored to your requirements.

Who Builds Indicators?

Who designs and makes those custom indicators that you can find out there and download for your own use – whether you pay for them or not – and should we care? The short answer is, of course, we should care a bit. Here’s why: While some custom indicators are made by traders and enthusiasts with some knowledge of how trading and the markets work, there are a great many indicators out there – maybe even most of them – that are made by programmers. Now, being good at coding is important to make a good custom indicator but that does not necessarily mean it will result in one that is actually useful. More to the point, it does not mean that it will result in one that is useful for you.

Evaluating Indicators

Ok, bad news first: There is no shortcut. Of course, if you’ve been forex trading for almost any amount of time at all, you will have been able to figure that answer out for yourself because there are no shortcuts to anything. If you’re not ready to put in the grind, you won’t get very far. That is particularly true if you’re a technical trader.

So, how do you chose the right custom indicators for your strategy? There’s no mystery here, the answer is you have to test them. Testing is important for two reasons. First, you will have to probably go through a large number of custom indicators to see what fits with your approach to trading. Even good indicators, those that work as advertised or as close to the way they are advertised as possible, may not be the ones that mesh with the system you are building. The second and even more important reason is that you need to test the dice out of indicators to make sure they work.

Once you download a custom indicator, take it to the testing range. Backtest it to make sure it worked in the past. This is the first hurdle and if it clears that, its time to upload it to your demo account and forward test it to see how it performs in the market. Moreover, forward testing is the best way to ensure that a given indicator will add value to your strategy.

The testing process you put custom indicators through needs to be rigorous. It has to be robust in two senses: First, it should comprehensively test each indicator you select and, second, it should test a broad range of indicators to provide you with a clear picture of what works and what works in your system.
Your friends here are time and work. The more indicators you put through a testing regimen, the better honed your system will be. Expect to test tens, if not hundreds, or even thousands of indicators throughout your career as a trader. The key is to avoid resting on your laurels but to always be learning and adapting.

Paying for Indicators

Should you go out and buy custom indicators to integrate into your platform? There is now a very broad market for custom indicators out there – some are free and some are paid-for. When you first encounter this it might seem a little daunting. You will ask yourself, are the paid indicators better in some way? As many experienced technical traders will tell you, ultimately there is no guarantee of a difference. Those who have already put the time and effort into exploring and testing the custom indicators that are floating around out there will have discovered the following: the main thing separating paid indicators from those you can download for free is that the person who made them decided to try to charge for them. The vast majority of custom indicators that somebody else made are likely to either a) not work properly at all, or b) not suit your particular system or strategy. This applies equally to those that are free and those that cost actual money.

So, should you just ignore the indicators that will cost you a few bucks? There’s an element of personal preference in the answer here. Because technical trading is an unending cycle of learning and re-learning, there is a good chance you will not regret paying for an indicator even if it turns out that it isn’t very useful. Even just by taking it through a robust testing process, you will learn something – both about the indicator itself and about your approach to trading. There is also the caveat that an indicator you pay for could turn out to be really useful to you and end up helping you to make many times over the 10, 30, or 50 dollars you paid for it.

It is also possible that you will pay for, download, and test an indicator and then decide not to use it. But that down the line at some point, as your trading strategy evolves and as you learn new approaches, you will want to go back to an indicator you previously decided to set aside. Maybe you will realize that you can tweak it to make it a useful addition to the way you trade or maybe the way you trade will change over time to the point that you need a new mix of indicators that will now include one you bought two years ago, say, and never used.

The Bottom Line

Whatever approach and strategy to forex trading you are designing for yourself, you will certainly benefit from the myriad of custom indicators available out there. You don’t have to feel like you have to pay for indicators – there is no guarantee that paid-for indicators will work any better than free ones. The key thing to remember is that any indicator you are thinking of using will have to go through a comprehensive testing phase – whether you chose to pay for it or source it for free.

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