Should we always rely on symmetry in buying and selling parameters?
Once you start learning about trading strategy and the technical indicators available, you will often see the same widely used parameters for popular indicators, as if these parameters were absolute rules that are set in stone.
On this blog post, we will know more about different perspectives on symmetrical parameters in Forex Trading.
The RSI (Relative Strength Index) is a popular indicator measuring the price changes over a period of time by highlighting overbought and oversold market situations. In article after article and book after book, the RSI’s “overbought” level is said to be >70, and the “oversold” to be <30.
Using this indicator, you can then assume that when prices are crossing up the 30 level, it’s a buying signal because prior to that prices have been weak. In the same way, you can say that approaching the 70 level, prices might be influenced by the selling pressure coming soon due to the strength of the prices over the period analysed.
But does this mean that 30 and 70 are the best parameters for you to follow? Does it mean that if you use the 30 level as a buying signal, you have to use the 70 as an exit signal? Do you have to follow these symmetrical parameters?
You can apply this line of thinking to other indicators: Stochastic (80 ; 20), Commodity Channel Index (+100 ; -100), a MACD and Stochastics “double-cross” strategy…don’t forget that every indicator is configurable, trading signals should not necessarily come from the “out-of-the-box” parameters. It’s just a matter of testing them to know what’s best for your trading strategy in accordance Symmetrical parameters in Forex Tradingwith the markets you are investing in.
On the FOREX market, prices vary far more than on the stock market, and trading a currency pair involves buying one while selling another one at the same time. So, you need to take into consideration the profile and characteristics of 2 currencies while investing in one currency pair (central bank’s rate, economical situation, political (in)stability etc.). Because of these reasons, the FOREX market is generally more volatile and liquid than others, and prices may move a lot in a short period of time.
For example – let’s say that the prices of a currency pair you are analysing are in a downtrend, and prices are tending towards being oversold. At that point you realise that a RSI level of 20 is a more reliable indicator than 30 to characterize an oversold situation. In this down trending scenario, the RSI might never reach 70, but may sometimes reach 50 before going down again. Your system will then be more efficient using 20-50, rather than the default 30-70 parameters. It’s just a matter of adjusting to the situation.
Non-symmetrical signals could be more beneficial for your trading strategy
You don’t have to stick to a single indicator that will give you all the information you need in your trading strategy. Sometimes, you will use one technical indicator as an entry signal but another one for your exit signal and that might work better for you than using the same indicator for both.
In your strategy assessment, it’s best if you can take the time to explore different parameters for different indicators as a buying or selling signal in order to determine what’s best for you and your trading plan. What’s more, you should back test your plan before you start using it, which means trying different methods and different parameters before finding the best ones for you.
You should always ask yourself – how could one determine the optimal set of parameters and how they can change over time? As mentioned in a previous article, trading strategy can deteriorate with time and you need to be able to adjust your parameters to avoid starting losing money – no trading strategy is profitable forever.
A final word – just remember, you shouldn’t expect the evolution of an asset to have the exact same pattern when it goes up, as when it goes down.
For more info just click here