The Most Common Type of Technical Indicators and Analysis in Forex Trading
Understanding the price trend in forex trading is crucial in allowing traders decide whether to sell or buy. Technical indicators enable traders to predict and follow price trends. In this article, we will take a look at some of the common technical indicators in forex trading. These technical indicators include:
Pivot point analysis
Pivot point analysis is based on the identification of different support and resistance levels. The support level is identified as a line whereby the price is fluctuating below it and cannot exceed this line for a relatively long period of time. Similarly, a support level is a line that the price fluctuates above but cannot go below it for a relatively long period of time. The levels obtained from the pivot point calculations are named R1, R2, R3, S1, S2, S3 and the center line is called the pivot line (primary line). The first three important levels are R1, S1 and the primary pivot line.
When trading with pivot points, two strategies can be followed: Bounded trading and breakout trading. In bounded trading, the trader looks the current pivot level of the price. If the price reaches a resistance level and begins to reverse, the trader can go short/sell the currency pair. Similarly, if the price reaches the support level and begins to reverse, the trader can go long/buy the pair. When the price reverses and reaches the next level, the trader can exit the trade.
On the other hand, breakout trade works on waiting until the price reaches the highest support or resistance level and then goes beyond it. If this occurs, then the trader can sell or buy because the price has gone beyond the highest level. When the price breaks the highest support or resistance level, it often goes down below or high above the support or resistance levels.
The Stochastic and Relative Strength Index (RSI)
These indicators show how much the currency pair prices is changing during a certain period. RSI is a momentum oscillator that gauges the speed and change of price movements for a certain period; such as the total changes in the uptrend direction to the changes in the downtrend direction. It is calculated as a percentage. When the RSI goes above 50% it will indicate uptrend and when it goes below 50% it will indicate a downtrend.
The stochastic is similar to the RSI but it uses different calculations. It measures the current closing price in relation to the biggest price change during a given period. The stochastic defines the overbought and oversold areas in the price curve. When it is held above 80% for a long period, it is overbought and the price will plummet. When the stochastic is held above 20% over a relatively long period, it will indicate an oversold area and the price will surge.
Moving averages are a way to smooth the price curve from short-term fluctuations. This will give the trader a more lucid view of the price curve. This technical indicator works by taking the average of closing prices over a certain period of time. This period is determined by the forex trader when analyzing the curve. The average of closing prices is taken continuously over every period.
When trading with moving averages, traders can look at the moving average curve (which is drawn overlapped with the main currency price curve) and see if it is going high or low to determine the trend.
A more ingenious idea is to draw two moving average curves, one slow and one fast. The slow one will be averaged over a high number of periods while the fast one will be averaged over a low number of periods. When the fast curve crosses the slow curve, this will indicate a trend. When crossing from high to low, then the currency price is going down and vice versa.
Moving average crossover divergence (MACD)
The MACD indicator is calculated by subtracting the previous moving averages to obtain resultant moving averages i.e. the MACD is the difference between the last calculated moving averages. When the MACD is zero, it indicates a crossover, signaling a price trend. When the MACD is positive, it indicates the currency pair price is going up. When the MACD is negative, it indicates the currency pair is going down.
An important note about the above indicators is that none of them can be used exclusively and work efficiently. The trader must select a combination of the above so as to reliably analyze and predict the price trend. Each trader has their own strategy for doing this.
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