Let me ask you a question. Ready? When trading stocks or futures, what is the key? What one technical component is the one that makes the winning traders gobs of cash?

In my opinion it’s volume confirmation. Is volume spiking? Is the volume dying away to nothing? These are huge clues that the best stock and futures trades watch like a hawk.

In fact some of the best traders of these markets, trade just using price and volume.

Guess what? In forex trading we don’t have any good volume numbers on the retail trading level (which is where we all trade). So we transported technical analysis over here and left the most valuable part (volume).

No wonder forex traders struggle. Is technical analysis broken? All I can give you is my personal solutions that have worked for me. It’s actually a three-part fix.

1) Trade actively only during liquid times. (This rule doesn’t really apply if you’re just trading a lot or two.)

2) Be very wary of very volatile markets. Extreme volatility can look like a lot of traders are active. In reality, just a handful of trades all doing the same thing when no one else is trading can cause the market to go haywire (e.g. just after non-farm payrolls). It’s like a spring stretched too far. You know it’s going to recoil hard, you’re just not sure where it’s going to end up. Stay away!

3) Use methods of trading that were originally designed for use without volume. If you trade with a method that was designed for use in conjunction with volume, you’re asking for trouble.

Of course, this brings up the problem, can I really use the same common indicators as everyone else and still make money? What is my edge?

We’ll dive into that in part two of “Is Technical Analysis Broken?” Stay tuned…

By: Nathan Pennington

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