February 5, 2014

DayTrading Fail: Know The Basic Indicators First Before Advancing

Forex charts are used by foreign currency traders to help determine buying and selling opportunities. In addition to simple charts that show general trend patterns, many indicators are used by traders to witness price action movement on a much deeper level. Most charting software platforms provide a wide range of indicators for traders to measure trend strength, possible trend reversals, buy/sell signals, and much more useful information about the chosen currency pair. There are many indicators utilized by Forex traders on a daily basis, but the most commonly used indicators have a long history of success.

indicators on monitors

Too Much Too Quick Bro!

Moving Averages

Moving averages function to smooth out price action over a specified period in order to identify a trend. They do not necessarily foretell price direction, but rather they provide the current trend with a lag. The lag exists due to the fact that moving averages are based on past prices. However, despite having a slight lag, moving averages serve to give a clear and smooth vision of price direction. Moving averages are not just used by themselves, but they serve as the building blocks for other widely used indicators, such as MACD and Bollinger Bands. The most popular types of moving averages used by traders are the Exponential Moving Average (EMA) and the Simple Moving Average (SMA). Not only can these moving averages identify trend direction, but they also serve to identify support and resistant levels.

MACD

Originally developed in the late 70s, the Moving Average Convergence-Divergence indicator is a very simple and effective indicator of price momentum. It operates by subtracting a long moving average from a short moving average, thus creating a momentum oscillator capable of following a long or short term trend and current momentum. The MACD indicator moves below and above the zero line as both moving averages diverge, converge, or cross. This allows traders to look at both moving average line crossovers and points on the graph that rise above or fall below zero for possible signals. However, due to the unbounded nature of this indicator, it is not helpful in locating oversold or overbought levels.

Relative Strength Index

The Relative Strength Index, commonly referred to as RSI, is also a momentum oscillator, except unlike MACD, it measures the speed and change of price movement. Ranging from 0 to 100, RSI shows currencies as overbought when they reach above 70 and oversold when they fall below 30. By using this, traders can determine buy or sell signals with relative consistency. Traders can also use RSI to generate signals by looking at center line crossovers and divergences.

Stochastic

In use since the late 1950s, the Stochastic Oscillator indicates the location of the close price in relation to the high-low price range over a set amount of time. Instead of following price or volume, the Stochastic Oscillator follows the speed or momentum of price. Due to the fact that momentum always changes before price, the Stochastic is a very useful indicator, allowing traders to know when a reversal will take place beforehand. The range-bound aspect of the Stochastic Oscillator also makes it very useful in identifying oversold and overbought price levels.

Max Hansson

Max Hansson is a guest author to the site. Writing about risk, chart strategies and money management. Max is an active day trader of forex, mainly EUR/USD and GBP/USD.