There is a new category of technical analysis available for trading in the FOREX markets. It’s called Theory of Changes, and this new technique is based on Ratios of Change that break down the three main types of chart conditions:
- Agitated markets
- Uptrend markets
- Downtrend markets
What Shift Theory Ratios do is focus on the important data and ignore the data responsible for the false signals and noise. The trade theory of exchange approach works better than any other form of technical analysis because it focuses on the science of price analysis. Most of the current technical analysis focuses on the closing price as the main data being analyzed. The main problem with that is that the closing price is a moving 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 the weight yourself on a scale. If you keep jumping while trying to weigh yourself, it is almost impossible to get an accurate reading. That is exactly what the closing price does. It changes every time there is a bullish or bearish tick and that changes the reading of most indicators and that results in a lot of noise and false trading signals.
Trade change ratios are based on the undeniable facts of market trends. Some examples are:
- Prices on a chart can only go up if they hit a new high.
- Prices on a chart can only go down if they hit a new low.
- Agitated markets have bars that have a high percentage of overlap.
As a trader, Shift Theory Ratios are an excellent tool to keep traders disciplined and attached to sound trading principles. As an example, we will cover the reading and indications that Shift Ratios give in 3 types of market conditions:
- Chopped
- Upward trends
- Downward trend
When market conditions are choppy, the internal exchange rate is the graph that measures that kind of market condition. What Inside Shift Ratio does is measure the percentage of the current bar that overlaps the previous bar. All choppy markets have a high percentage of bars that overlap each other. It is easy to see on a chart, but most indicators simply cannot measure these types of conditions because they are based on the closing price.
If the market is trending upward, then the top rate of change is the indicator that measures that rate of price change. In bullish markets, the bars on a chart should be hitting higher highs and that’s an undeniable fact about markets moving higher.
During bear markets, the lowest rate of change is the indicator that measures the strength of the downtrend. This again is based on the undeniable fact that bear markets must make lower lows in order to move down.
In the end, these techniques work and the proof is in the posttests. A dirty secret that many indicators have is that they don’t really work and that is why no one is willing to show back test results. So if you want to find the best FOREX trading indicator, you should take a look at the forex theory rationale. If you want consistent and proven results, then as a trader you need to focus on the important data and ignore the data that is responsible for noise and signal lag.