The first step to a successful forex trader is to understand the technical indicators. They pioneer your decision making, setting the distinction between noise and expert traders.
The most typical technical oscillators are:
- Stochastic oscillator.
- Moving average convergence divergence (MACD).
- Bollinger bands.
- Relative strength index (RSI)
- Fibonacci retracement.
- Ichimoku Kinko Hyo.
- Average directional index (ADX).
Here’s what you should know before using the technical indicators.
Major Groupings of the Commonest Technical Indicators
The above major technical indicators fall under the following major categories:
These indicators help you determine the price change speed per time. They show top and bottom prices.
Also referred to as lagging indicators, trend indicators show past information and their influence on current price levels. They tell the direction of price change.
The significant lines of motion are up, down, or sideways. They move along high and low values in a wavy manner.
They combine the leading and lagging strengths.
Leading indicators explain where the price is heading, while lagging indicators give background reports of factors that caused current price levels. They check the probability of a bull or a bear occurring.
They echo how much the currency price is projecting in a direction. They help in realizing the most viable trading opportunities. They are mostly applicable in day trading.
Here’s a further breakdown of the significant technical oscillators:
7 Technical Indicators and How to Use Them
1. Stochastic oscillator
It compares a currency pair’s actual price to a range of prices over a time duration. This helps you to determine whether there has been a currency pair’s overbuying or overselling for the period.
It has a scale ranging between 0 and 100. A reading below 20 indicates overselling, while an 80-reading prove overbuying.
You won’t mind checking other indicators because it has one undesired weakness; it gives fake signals as soon as a market starts trending. Check the following supplements and alternatives to the Stochastic oscillator.
2. Moving Average Convergence Divergence (MACD)
MACD is a trend indicator that combines a slow line and a fast line, meeting to form a histogram. The histogram (from the two MACD lines’ difference) gives a buy or sell signal.
The histogram’s height or depth and speed of momentum’s change help you know more about a particular market.
3. Bollinger Bands.
It is one of the day trading indicators with the lines. The middle line (of the simple moving average) compares against two upper and lower (standard deviation) lines.
The distance between the lines and the central line creates a band that indicates market volatility.
The volatility projection affects your trading decisions. For example, you can enter extended trading when the current bar closes above the upper band.
4. Relative Strength Index (RSI)
Like a Stochastic oscillator, RSI is a trend indicator that has a scale ranging between 0 and 100. A 30 or below reading proves a market overselling, whereas a 70+ reading indicates an overbuying of a currency pair.
You should buy when the RSI falls below 30 and sell when it reads above 70.
5. Fibonacci Retracements
These are horizontal lines expressing the support and resistance points. To find the support and resistance points, determine the length between the peak and trough, then divide the result by the Fibonacci ratios.
The Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8%, and 78.6%. The points show the points where a currency pair’s momentum is likely to reverse, helping you set stop-loss and take-profit orders.
6. Ichimoku Kinko Hyo
Like Fibonacci retracements, the Ichimoku Kinko Hyo expresses momentum by showing areas of future support and resistance points. This is possible through red, green, blue, and a red/green band.
7. Average Directional Index (ADX)
It is a technical indicator that helps you determine a currency pair’s momentum and trend. Its values range between 0 and 100. A reading below 20 shows a weak trend, while that of above 50 indicates a strong trend.
Knowing the trend, volume, and speed of forex currency pair prices is more comfortable with a wealth of technical indicators available in the market. They guide you on when to buy or sell, thereby shielding you from the losses of noise trading.