In previous articles we’ve discussed various methods for trading in the forex market – specifically with technical strategies. It can be daunting knowing where to start so we’re going to introduce a few indicators to get started. Once you’ve got a grasp on these, you can use them to help execute profitable trades. Each of these indicators relate to technical trading strategies in the forex market.
1) Moving Averages
The first indicator is called moving averages and helps to identify overall trends in a particular currency. It is considered a trend-following measure since it lags the actual prices of a currency. However, this makes sense since it is an average of past prices. There are two types in particular:
Simple moving average (SMA): This is simply the average price over a given number of days with equal weight for each.
Exponential moving average (EMA): This is also an average price over a given number of days, but in this case it places more emphasis on recent prices.
You may have noticed that in each description above, we said “over a given number of days,” It turns out that you can choose an arbitrary number of days you’d like to examine. For example, you can calculate a 10-day moving average, a 15-day moving average and so on.
So what does this indicator tell you? Well, when you conduct a series of moving averages, a rising moving average indicates an uptrend. On the other hand, a decreasing moving average indicates a downtrend in a currency’s price.
2) RSI (Relative Strength Index)
The second indicator we shall discuss is called the RSI, otherwise known as the relative strength index. This measure has an oscillating nature that measures the speed and magnitude of price fluctuations. Essentially, this indicator aims to help you buy low and sell high. To do this, it sends signals to help identify when a particular currency is either oversold or overbought. In the case of either, a price reversal is likely, meaning you should take action and capitalize on this insight. The RSI ranges in value from 0 to 100. Generally, a value above 70 and up to 100 means a currency is overbought. If it is between 0 and 30, the currency is thought to be oversold. In the former case you should sell and in the latter case you should buy.
Another oscillating measure just like the RSI, this measure acts as a momentum indicator. Again, it will help you to identify when a currency may be overbought or oversold. In either case, a price reversalthat you can act on is likely not far away.
The way this measure works is this. It compares the closing price of a currency to the range of its prices in a given time period. Are you wondering how this is relevant? Well, in an upward trending market, the currency’s price will tend to close near the range’s high. In a downward trending market, the currency’s price will likely close near the range’s low.
4) MACD (Moving Average Convergence and Divergence)
The final technical indicator we shall discuss for forex trading is called the MACD – moving average convergence and divergence. Just like the moving average we discussed first, this measure is said to be trend-following and is a momentum indicator. Essentially, it will show the relationship between two moving averages of a currency’s price. Specifically, it compares the following two elements.
MACD – This is calculated by subtracting the 26-day EMA from the 12-day EMA
9-day EMA of the MACD – This is called the “signal line” and is used to provide buy or sell signals
Since we will be comparing two moving averages, you should know the three ways to read this measure:
Watch for crossovers. When the MACD falls below the signal line, it is an indication that you should sell. If the MACD rises above the signal line, it means you should buy.
Divergence of MACD and currency price. When the currency price begins moving away from the MACD, it means the end of the current trend is near. Depending on the direction of the movement, you should prepare to either buy or sell.
Significant increases. A significant price increase implies that the short-term moving average is moving away from the long-term moving average. This suggests the currency is overbought and will likely correct itself.
One final comparison you should keep an eye on involves the zero line. When you use forex trading software, the zero line will become clear to you. In the meantime, stick with us. If the MACD is above the zero line, it signals an upward trending market. However, if the MACD is below the zero line, this indicates a downward trending market.
And that concludes our overview of thefour technical indicators you should keep an eye on when trading in the forex market. If you’re wondering where exactly you’ll encounter these measures the answer is on trading and analysis software. You don’t have to worry about trying to calculate these measures yourself. Instead you can analyze these indicators across a variety of platforms. Let the computer do the hard work for you – just make sure you can interpret the results!
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