Forex trading is a skill that you learn partially by experience and partially by knowledge. Both are necessary to become an expert. Technical knowledge without the experience of forex trading won’t give you the desired result and trading without knowledge will be very big mistake.
To become an expert you have to learn fundamental and technical analysis of forex trading.
Fundamental analysis is a way to analyze the market considering factors like the economic condition of the country, geopolitical situation, relation with other countries, the major decision of the national and international organization. All these factors affect the exchange rate of currencies.
Technical analysis is the analyzing market trend with historical price, use of indicators, identifying resistance and support of price trend, the study of the price chart. It is used to predict future movement in the price trend.
Here we are going to discuss technical indicators
Technical indicators are the graphical representation of price trend with special lines. They help to analyze the forex market trend. As the name suggests they are used in technical analysis of price trend.
Many beginners in forex trading avoid learning about technical indicators. At first, names of these indicators seem scary for example MACD, RSI, BOLLINGER, STOCHASTIC; they make you avoid learning them.
Let me tell you one thing, technical indicators will make forex trading very simple for you. You will be able to read the chart in a better way and will be able to analyze the market trend.
Are you ready to learn about technical indicator for forex trading?
Let’s start !
How technical indicator works?
Many young traders wonder if technical really works. And if they do, how do they work?
The fact is technical indicators don’t do magic. Every technical indicator follows a mathematical formula with a bit of calculation which helps us to read the market trend, about profit and loss, when to sell you and buy the currency, to analyze major support and resistance in currency rate.
It is not like you can not trade without the use of indicators but to increase the efficiency of trading will increase with the use of this.
We will try to make it as simple as it can be, to give you top 3 best forex trading indicator that experts use.
They are MA (Moving Average), Bollinger Band, MACD(Moving Average Convergence Divergence).
1. Moving Average – An indicator of trend analysis
Moving average is the most basic and most simple indicator among others.
It helps to understand the trend.
Principle – It uses the average of the prices over the previous days.
In layman’s term – Moving average basically follow the change in price over the time. It reduces the “noise” of another disturbing element of unwanted price. You can focus on the main trend with this. Moving average only shows the current price trend.
When the price is above the moving average line it shows the bullish trend and when the price is below the line that means the market is bearish.
Forex Traders use multiple moving averages to enter the trade to get entry and exit signal.
Major moving averages are 20,50,200 days. 50-200 days crossover is known as the golden ratio cross over as it gives the best price signal.
There are four types of moving averages which are; simple, exponential, smoothed, linear weighted.
Advantages and Disadvantages
- Moving average is good for identifying the market trend. Shows important support and resistance of the currency prices
- It can not be used to predict the market trend as the signals it provides is lags behind. It runs bit slowly.
2. Bollinger Band- A volatility indicator
John Bollinger, a long-time technician of the markets, devised this technique to analyze the market. In this also moving average is used with two trading bands, above and below the middle moving average. It is most favorable for analysis of market volatility.
Principle – Bollinger band is presented by three lines of moving average. The middle one is a 20-day moving average, lower and upper lines(band) change by the standard deviation.
In laymen’s terms – In the Bollinger band, the price trend is shown between the two lines. The price usually moves along the middle line. Sometimes price can move beyond the outer band but comes back fast. The broadness of the band represents the volatility of the market. When it widens means increase volatility and when narrows means decreased in volatility.
When price move above the upper band it is the buying signal and when it moves below the below the lower band it is the selling signal. Investors take the long position if previous day close was above the top channel and takes a short position when the previous day closes below the lower band.
Advantages and Disadvantages
- The Bollinger bands can be used for analysis support and resistance. In this, the band can be used to analyze major support and resistance to open position.
- It is not recommended for highly trending market. When the market changes very quickly the bands take time to update.
3. MACD – An indicator for trend confirmation
MACD (Moving average convergence divergence) is the master indicator. Many expert traders follow this analysis. It shows when the market trend will change after moving in the same direction for a long time.
Principle – MACD is the indicator of the difference between 26 period and 12-period exponential moving average price. It contains the 9-period moving average signal line. It uses the combination of momentum indicator and moving averages of prices.
In layman terms – MACD is a moving average indicator but it also includes the principal of an oscillator indicator. It uses more calculation than a simple moving average graph. As an oscillator moves up and it has to come down, similarly an oscillator indicator represents the price chart. MACD shows the price trend with the histogram. MACD histogram is to identify when will be the bullish or bearish momentum will be high.
MACD is best to read the strong trend and weak trend in the market.
1. Crossover – Crossover in the MACD indicator is believed to be most reliable when you want to confirm the popular trend. It is when two periods cross each other and when lines cross histogram. After the crossover trend changes most of the time.
2. Divergence – When the lines diverge from the highs and lows of the corresponding price in MACD, this is known as divergence. There is bullish and bearish divergence. When the MACD forms two rising low that correspond with two falling lows that is bullish divergence.
3. Zero Line – When MACD crosses the zero line, it shows the market trend either bullish or bearish. You should buy when histogram rises above the zero-line and sell when it falls below the zero-line. Note that this type of forex signal is weaker than others.
4. Accelerated Rise and Fall – When you analyze MACD indicator you will come across the rapid rise and fall of a currency price. It usually happened when a shorter time period line crosses the longer time period line. This point signals the overbought and oversold price
5. Histogram and Signal Line – If MACD is above signal line the histogram will be above the MACD baseline and vice versa. MACD histogram is to identify when will be the bullish or bearish momentum will be high.
6. When short term crosses long term MA below the zero line in the upward direction this shows uptrend or bullish trend. When short term (12-period) crosses long term(26-period) from upside, this represents a bearish trend which is the selling signal.
Advantages and Disadvantages
- MACD is good for trending market and to analyze the range of price. As it is the combination of the other indicators it is more precise result.
- Due to same reason as in moving average, some signals come late, therefore, it lags behind the current currency rate.
Time frame plays important role in the technical analysis. There are three main time frames to analyze technical indicators.
Long-Term – Weekly chart analysis.
Intermediate – 4 Hours or daily
Short-Term – 1 Hours 30 mint
Many forex traders avoid short term times as it leads to overactive trading which is not a profitable way to trade. In short term time frame, you usually get false signal which can lead to losses.
Forex trader gets entry, exit idea depending upon their time frame choices. Mostly long time frame gives you a clear idea about the market trend.
MMF Key Takeaways
We have learned that all indicators are useful. All of them have some advantages and some disadvantages. If you will have knowledge of how to read analyze them it can be very useful for you to understand the forex price.
Forex trading is the global level of trading. To trade among top global investors you should be aware of all aspects of the market analysis. Though the above indicators have some limitations they are very valuable for technical analysis.