Posts Tagged ‘forex indicators’
Forex Chart Study : More on Indicators
Forex chartists use price charts to identify apparent market trends. But mere identification is not enough. They need to know how strong and lasting the trends are. This is done with the help of indicators.
Moving Averages
Being one of the most widely used indicators, these lines laid out on charts average out short term fluctuations enabling one to observe long term trends.
Simple moving averages average all price points over the whole period, like a normal average. Weighted moving averages also smoothen out the price curve, but emphasise on recent price changes more than past ones. The third type are exponential moving averages and are different from the other two in that they multiply a certain percentage of the latest price with previous averages to obtain the average curve.
It can take some time to find what combination of moving average and period length works best for the currency pair you’re targeting. Once you find the right combo, you will be able to trace patterns easier, and hence keep track of your trades accordingly.
Stochastics
These are studies that indicate trend sustainability and price reversals. %K and % D are the two types used in stochastics, measured on scale of 0 to 100; %D is a slow, long term indicator while %K is the faster more responsive indicator. These studies serve no useful purpose in a choppy sideways market.
Relative Strength Index (RSI)
The RSI also measures price movements on a 0 to 100 scale. It is advisable to confirm RSI signals with other indicators. RSI will vary according to the time frame used. Short term RSI fluctuates more and is suitable for day traders while long-term position traders will benefit more using a longer time frame.
Moving Average Convergence Divergence (MACD)
Mac-dee charts the differences between exponential moving averages (26 day and 12 day). A 9 day moving average is used as the trigger line, which when crossed by MACD gives a bullish or bearish signal (going higher than or lower than the trigger line respectively).
There are other indicators like Bollinger bands and Fibonacci retracements which are also used, but the above mentioned indicators are the most commonly used ones.
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Analysing Indicators and Spotting Trends
We are now aware of the various technical indicators that are used in technical analysis in the forex market. In this article we will see how indicators and trends are related. One of the best things to do during technical analysis is to use more than one indicator to get a fairly good idea of the how strong a potential trend is and how long it is likely to last.
A trend, from a trader’s viewpoint is basically a predictable movement of prices at support and resistance levels. If prices break either of these levels, it is a strong indicator of the trend’s staying power. Identifying trends on historical charts is not a difficult job; it can be done with near perfection. But accurately predicting and identifying price moves while the trend is still developing is a harder task. Draw trendlines over longer time frames, and gradually move down to shorter intervals (of the order of hours). This way you will not miss the long-term trend in trying to identify the short-term ones.
The Directional Movement Indicator (DMI) is a valuable tool that reduces guesswork and enables us to confirm our trendline analysis. It has two parts:
- Average Directional Movement Index (ADX): A higher ADX indicates a stronger trend. A reading of over 20 usually indicates a lasting trend. A sudden drop in ADX signals exit time, until a fresh signal is obtained from DI lines.
- DI Lines (DI+ and DI-): When the + reaches and crosses – levels, it is a buy sign, and vice versa.
A number of traders also refer to what is called the parabolic indicator to confirm ADX signals.
These methods can be used for the short term, even in a sideways seemingly trendless market. But as an obvious precaution, keep in mind the larger trends. Playing on a short term trend totally against the larger one is stupidity.
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