Using Technical Indicators in Forex Trading

  • 17
    Aug 2018

    Using Technical Indicators in Forex Trading

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    Technical trading indicators is something traders spend a lot of time trying to understand, and, to be frank, we also spend lots of time teaching it. Probably driven by the excitement of testing out new indicators and the hopes of finding that one strategy that will kill it in the forex market, it seems that all new traders are curious about indicators.

    To the disappointment of many people, however, the one formula that can turn a new trader into an instant millionaire doesn’t seem to exist, at least not as far as this author is aware.

    Still, there are some things you can do to help move the needle in your favor. The crucial thing to understand is that although technical indicators are no holy grail, they can still add tremendous value to an already existing trading strategy, or serve as the building blocks of a new strategy you are developing for yourself.

    For example, try to add a non-correlated indicator to a trading strategy you are already using. You could do this by applying the indicator to your chart, and only make the trade if your old strategy and the new non-correlated indicator both give a “buy” signal at the same time. Check for yourself how this works – maybe you’ll find that your win rate goes up quite a bit with a simple tweak like this…!

    The Three Best Technical Indicators

    1.The Moving Average Convergence-Divergence, better known as MACD, is a popular trading indicator that is used across markets from stocks to futures and forex. It is often used as a buy and sell signal by itself among momentum and trend following traders, and is in fact very easy to use despite the rather complicated-sounding name.

    The Moving Average Convergence Divergence

    The MACD indicator conveniently produces buy and sell signals in the form of blue and red lines that crosses over each other. The rule here is simply to buy when the blue line crosses over the red line, and to sell when the red line crosses over the blue line.

    2.Relative Strength Index(RSI) is another popular indicator that has been in use among professionals and amateurs alike for quite a long time. However, this indicator has stood the test of time and is still very useful to keep an eye on.

    The standard way of using the RSI is to look for readings that indicate that the market is either “oversold” or “overbought,” and thus about to reverse. Technical analysts generally agree that a reading below 30 on the RSI indicates oversold conditions, while a reading above 70 indicates an overbought market.

    Relative Strength Index

    In my own opinion, however, the best way to use the RSI is to look for divergences between the price trend and the RSI line itself, as I have shown in the chart below.

    Relative Strength Index

    Here, you can see that we had two situations where the price continued to make new highs, while the RSI at the same time failed to make another high. As a result, we got a divergence between the trendlines on the price and the RSI – an amazingly accurate predictor of a change in market direction that you should pay attention to!

    3.The Stochastic indicator is another great indicator to use, in particular when combined with other indicators such as the RSI – a combination that has produced great results for some traders.

    Just as the MACD, the Stochastic indicator (often just referred to simply as “stoch”) measures the trend and momentum of a price movement. By itself, it is most often used as a buy/sell signal where traders will buy on readings below the bottom green line and sell on readings above the top red line.

    Stochastic indicator

    If you want to learn more about technical trading indicators, feel free to download our trading indicator fact sheet. Consider printing it out and keeping it close to your desk at all times to remember these essential indicators as you continue on your trading journey!

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