What is the Psych Indicator? What does this indicator do? When should you use it? All of your questions answered about our Psych Indicator…
What does it do?
The Littlefish FX Psych Indicator displays a really neat visual aid on your NinjaTrader7 platform. Our Psych Indicator gives an idea of current market psychology and therefore how you should be positioned. We use it in the following way:
Littlefish FX use: Cross above and below 50 provides our trade bias allowing us to trade with the trend. To help with this our indicator has a Basic and Advanced setting to further support trend following
What’s the best thing about it?
The best thing about this indicator is the indicator works similar to the psychology of the order book; typically if Retail Traders see lots of candlesticks going up then they short and increase the trend up higher, and if they see lots of candlesticks going down then they buy and increase the trend lower (banks and smart money flow typically does the opposite).
It is important to remember that trading with the underlying trend in a market is a a far more forgiving trading strategy than the far less forgiving approach of counter trend trading. Even a slightly mispositioned with trend entry will have a statistically higher probability out come than a perfect counter trend entry.
Ok. So why is psychology important?
We know that 95% of retail traders fail and ultimately liquidate their trading accounts. As highlighted above, the principal reason for this is that retail traders suffer from a need to fade moves on the simple belief that a market cant go higher or can’t go lower.
Professional traders on the other hand accept the market for what it is and follow the price action – not their gut feelings about markets levels. Professional traders stick to a disciplined trading plan and they don’t allow themselves to become emotional about the market.
And what about market psychology?
Understanding the market psychology and positioning allows us to align ourselves with the market participants that are actually responsible for moving the market, large institutions and hedge funds. If we can align ourselves with these players and ride their coat tales we give ourselves a greater possibility of having profitable trade outcomes.
Professionals know that fighting the bigger players in any market is a futile and very costly endeavour. So any edge we can gain that will alert us to the foot print of what the major market movers are doing is extremely useful and potentially very lucrative .
Market psychology is a simple tool to give us the direction of the overall price trend and therefore the current flow of the market orders.
Above we can see an example of the Psych Indicator applied to a candlestick price chart.
The indicator has two key elements to it:
- Firstly, the Oscillator in the bottom panel, this oscillator is a pictorial representation of the extremes and mid points of the market psychology. Readings above 80 and below 20 suggest extremes in market participants psychology and suggest the potential for a turning point in the price action.
- Secondly, the arrow alerts that appear on the chart, these arrows suggest a psychological pattern that gives a high probability of price action to follow the candle that the arrow prints above or below. So when a green arrow prints we anticipate bullish price action to follow and when a red arrow prints we anticipate a bearish price action to follow.
How Do We Use It?
There are numerous strategies we can use based around the Psych Indicator and we go into these in great detail within our Forex Trading Course, but we will of course highlight a basic strategy here for you.
A straight forward and profitable strategy to employ with the Psych Indicator is to trade in the direction of the arrow alerts on the price charts.
We simply follow the directional signals created by the arrow alerts on the chart. When an arrow alert prints we can play the break of the bar that closes in the direction of the arrow alert as shown below
We can also use the Psych indicator to take profits on positions or to help us trail our stops to secure larger profits on longer trends in the market. In the chart above once we get our second sell signal and price extends to the downside we can stay in our short positions until we see a green arrow alert. When the next green arrow alert prints we can trail our stops on our short positions too 10pips above the high of the daily candle the arrow alert prints under.
We repeat this process as new alert arrows print, our trailing stop on the initial short position gets triggered on the upside break of the second green arrow alert as price consolidates. The profit on this trade is 600pips based on an initial trade risk of under 100pips, this gives a 1:6 risk reward ratio. It is this type of trading approach and trade return metrics that position us on the professional side of the market.
Furthermore, you can see that we can continue to reposition our selves as new arrow alerts print using the same process as outlined above.
Trading with the Psych Indicator arrow alerts alone allows us to profit from the majority of the decline in the chart with very little effort or stress!
Got any video guides on the Psych Indicator?
We sure have, watch the video below…