$50
3 pips
$50
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Technical forex trading generally involves developing an objective trade plan that often incorporates one or more of the more popular technical indicators. While many technical indicators exist, descriptions of some of the most helpful technical indicators and their most common usage to generate trading signals follow:
Relative Strength Index or RSI
Tells a technician whether the currency pair is trading in oversold or overbought territory, and hence might be due for a period of correction or consolidation. An RSI reading of 70 or greater indicates the market is overbought, while a level of 30 or less gives an oversold signal.
Moving Averages
Calculating moving averages of exchange rates smoothes and slows the action so that short-term fluctuations disappear and the longer-term trend becomes clearer. Technical analysts often compare the current exchange rate to its 200-day Moving Average to ascertain whether the long-term trend is up or down. Also, trading signals can be generated by observing crossovers among moving averages of short and longer time periods. When the short term moving average crosses from below to above the long term, a buy signal is generated, and vice versa for a sell signal.
MACD (Moving Average Convergence Divergence)
This indicator shows the difference between short and longer term moving averages, with a crossover in the central (zero) region generating a trading signal. If the MACD crosses positive, that would generate a buy signal, and if the MACD went negative, that would indicate a sell.
Historical Volatility
Volatility measures market risk due to past exchange rate swings, and historical volatility is calculated as the annualized standard deviation of observed price changes over some given time period, often 20 or 30 days. The higher the indicator, the more risky the market has been to trade over the time period included in its calculation.
Bollinger Bands
Forex traders use Bollinger Bands to highlight areas of overdone market activity. The indicator is calculated as a chosen number of standard deviations both above and below a simple moving average of the exchange rate action over a selected period. Common parameters include two standard deviations and a 20-period moving average. Traders might use the indicator to buy at the lower band or sell at the higher band, and then look to close the position when the rate moves back to its moving average.
Directional Movement Index or DMI
The DMI measures trend strength over some chosen time period, usually 14 days. The indicator ranges from 0 to 100 and generally comes with three components, the +DI (strength of upward trend), -DI (strength of downward trend) and ADX (Moving Average of the DMI). When the +DI crosses upward above the -DI, a buy signal is generated because the prevailing trend is now upward, according to the indicator.
Momentum Indicator
The Momentum Indicator measures the speed of market changes and is commonly used to identify the strength of exchange rate moves. It can also be used on moving averages.
Stochastics Oscillator
The Stochastics Oscillator is a particular type of momentum indicator used to provide a clue to directional changes in the market. A trade alert arises when the exchange rate diverges from the %D line, but the trade signal itself comes when the faster-moving %K line crosses the slower %D line of the indicator.