There is no safety net or holy grail in forex trading; it more like gambling – you win some, you lose some. When you start trading in forex, technical indicators are your best bet in establishing a large margin.
Learning how to trade in forex successfully requires you to know how and when to use technical forex indicators to work out your strengths and weaknesses organically.
These mathematical tools are used to analyze the open price, low, high, volume, and closing price. They appear plotted graphically as the chart patterns. They can help overlay the price chart or draw separate windows. There are different technical analysis indicators developed for daily charts and the stock market, including:
Relative Strength Index (RSI)
The RSI is a momentum indicator used to signal overbought and oversold instruments by measuring the magnitude and velocity of price movements. It works by comparing the closing prices of a current and previous market to map out up and downtrends.
The outcome is then turned into EMA or SMA by calculating the relation between the uptrend EMA to the downtrend EMA, using an oscillator on a 1 -100 scale. If the difference grows more significant between yesterday and today, the momentum will be stronger.
Hence, the RSI oscillates upward if the future close appears higher than the previous one. It will indicate a sell signal once it reaches the overbought area (80 thresholds). When the RSI makes a lower high, the price will make a high indicating a bearish signal.
Moving Average Convergence/Divergence
The MACD is a trend indicator that reveals any changes in strength, momentum, direction, and duration of a trend. It is meant to be used on forex daily charts as it uses moving averages of 12 & 26 periods. The MACD line, therefore, shows the difference between 12 and 26 EMAs.
When the price makes a lower low or a higher high, MACD will indicate divergence, which hints at a change in the price action. When the indicator line crosses above the signal line, you can opt to buy. If the vice versa happens, you can opt to sell.
We recommend going long whenever the lines cross upwards and going short when they cross downwards. MACD can also indicate a bearish divergence when it moves downward, and the price moves upward. The vice versa will display a bullish divergence.
Stochastic oscillators help traders identify overbought and oversold trends by measuring momentum. It works by evaluating how the closing price relates to the price range.
During a downtrend, the price tends to close near the lows. In an uptrend, the price will close near the trading range’s high. The stochastic oscillator uses an 80/20 overbought/oversold threshold; hence its plotted within the 0-100 corridor on the chart. It will indicate overbought conditions when the reading is over 80 and indicate oversold when under 20.
The MA indicator works by averaging the currency price of the pair over a period of time. Using this indicator, you can tell the direction a pair is moving – whether down, up, or sideways. You can opt to use moving averages like EMAs (Exponential Moving Averages) and SMAs (Simple Moving Averages).
Bollinger bands are volatility indicators that also use SMA or EMA and envelopes the moving averages by two standard lines. The lines help create a dynamic corridor for prices to bounce within. The two standard deviation lines are drawn above and below the 20-period moving average. The indicator enables you to observe the currency pairs and how they keep behaving.
Average True Range (ATR)
ATR is a volatility-based indicator used to monitor market prices and compare them to their historical values. It works by subtracting today’s low from today’s high. If the range is outside today’s range, it extends to yesterday’s closing price.
The more significant the price difference, the higher the indicator goes and the higher the market’s volatility. Hence, ATR can help you adjust trading stops.
These forex trading technical analysis indicators will help you understand price actions better. Experiment with them and select one that works for your trading strategy. Taking up too many indicators can be counteractive because you are left with too much information to process, which blindsides your analysis.