There is a new category of technical analysis available to trade in the FOREX markets. It is called Displacement Theory and this new technique is based on displacement ratios that break down the three main types of conditions in the graph:
- Agitated markets
- Upward trend markets
- Markets with a downward trend
What change theory ratios do is focus on important data and ignore the data responsible for false signals and noise. The business approach to change theory works better than any other form of technical analysis because it focuses on the science of price analysis. Most current technical analyzes focus on the closing price as the main data being analyzed. The main problem with this is that the closing price is a mobile target. Many traders do not realize that indicators are nothing more than measurement tools and should be treated that way. When it comes to measuring price, you need stable data to get an accurate reading. I like to use an example of testing weighing on a scale. If you keep jumping while trying to weigh yourself, it’s almost impossible to get an accurate reading. This is exactly what the closing price does. It changes every time there is a rise or fall and this changes the reading of most indicators and this causes a lot of noise and false trading signals.
Foreign exchange trading ratios are based on the undeniable facts of market trends. Some examples are:
- Prices on a chart can only increase if they make a new high.
- Prices on a chart can only go down if they make a new low.
- Agitated markets have bars that have a high percentage of overlap.
As a trader, change theory ratios are an excellent tool for keeping traders disciplined and adhering to sound trading principles. As an example, we will cover the reading and indications given by exchange rates in 3 types of market conditions:
- Trend up
- Downward trend
When market conditions are turbulent, the internal exchange ratio is the plot that measures this type of market condition. What the inner scroll ratio does is measure the percentage of the current bar that overlaps the previous bar. All hectic markets have a high percentage of overlapping bars. It’s easy to see in a chart, but most indicators just can’t measure these types of conditions because they’re based on the closing price.
If the market has an upward trend, the higher exchange rate is the indicator that measures this type of price change. In uptrend markets, the bars on a chart should be reaching higher highs and this is an undeniable fact about moving markets.
During bearish markets, the lower exchange rate is the indicator that measures the strength of the downward trend. This again is based on the undeniable fact that declining markets have to make lower lows to go down.
In the end these techniques work and the test is in the subsequent tests. A dirty secret that many indicators have is that they don’t really work and that’s why no one is willing to show any results from subsequent testing. So, if you want to find the best FOREX trading indicator, you need to take a look at the ratios of change theory. If you want consistent and proven results, as traders you need to focus on important data and ignore the data responsible for noise and signal delay.