To trade forex, you cannot do without technical analysis. Let Tradehall’s forex experts guide you on what technical analysis is.
Getting started with technical analysis introduces you to trading indicators. Trading indicators are mathematical calculations that function as plotted lines on a price chart.
These lines help forex traders identify specific signals and trends in the market.
What is a technical analysis indicator?
Different variations coming from the same price information, such as open, close, high, low, and volume produce all the trading indicators available in the market.
In more specific terms, it involves the reviewing of charts. With this, chartists/traders can make decisions based on patterns and indicators.
These patterns are particular shapes where candlesticks form on a chart. Therefore, they can give you information about where the price is likely to go next.
Categories of indicators
There are 2 broad categories of trading indicators. They are the leading indicators and lagging indicators:
- Leading indicators are the indicators that lead the price movement. They give a signal before a new trend or reversal occurs.
- Whereas, lagging indicators are those that follow the price action (little delay). They give a signal after the trend or reversal has started.
So, follow along and discover the best technical analysis guide you should be aware of:
#1. Bollinger Bands
Volatility indicators inform you how much the price is changing in a stated timeframe. Such an indicator is Bollinger bands.
They consist of a simple moving average, and 2 lines plotted at 2 standard deviations on either side of the central moving average line.
The outer lines make up the band. Generally, the bands act as dynamic support and resistance levels.
If the candles breakout below the bottom band, the move will generally continue in a downtrend. If the candles breakout above the top band, the move will generally continue in an uptrend.
#2. Relative Strength Index (RSI)
With momentum indicators, they will notify you how strong a trend is and whether a reversal is going to happen.
A separate scale contains this plotted momentum indicator. There is a single line scaled from 0 to 100 that identifies overbought and oversold conditions in the market.
Readings over 70 indicate an overbought market, and readings below 30 indicate an oversold market.
The whole idea behind RSI is to pick the tops and bottoms and to get into a market as the trend is reversing.
#3. Moving Average Convergence Divergence (MACD)
This trend indicator lets you know which direction the market is moving in. It consists of a fast line, a slow line, and a histogram. MACD consists of the following three indicators:
- MACD line (Blue Colour): To calculate it, subtract the 26 Days Exponential Moving Average (DEMA) from 13 DEMA.
- Signal Line (Red Colour): The signal line is a nine-period moving average (Exponential) of the MACD value itself.
- Histogram: The difference between the MACD line and Signal Line plotted is a histogram.
When the MACD line (Blue) crosses above the signal line, it is bullish and when the MACD line (Red) crosses below the signal line, it is bearish.
The more the height of the histogram, the more is the strength/ confirmation of the move.
#4. Trade forex with stochastic
The Stochastic indicator is another momentum indicator. This indicator lets users find where a trend might be ending.
Traders or chartists use it to ascertain when an asset is overbought or oversold. Two lines plotted on a separate chart is the way to describe it.
As you might have already guessed, stochastic can help you to pick an entry point and get into a trend at the very beginning.
For instance, when the stochastic lines are above 80, the market is overbought, and a downtrend is likely to follow.
On the other hand, when the stochastic lines are below 20, this indicates that the market is oversold, and an uptrend is possible to follow.
To trade forex, you can use trading indicators in combination under technical analysis. It is an excellent way to give you more confidence in your positions.
Simultaneously, they also help prevent false signals so that there are overall chances to make a profitable trade.
Getting started with technical analysis is not a bulletproof strategy. However, it will skew the odds in your favor. Certainly, that is the best you can hope for.
Above all, use technical analysis indicators for your short-term and long-term forex trading.
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