Forex Technical Indicators Explained

Forex Technical Indicators Explained

Wondering how to succeed in the forex trading markets? Seeking the advice of a fully regulated trader is vital because the vast majority of novice traders will lose money – and so you need guidance from a professional with a clear grasp of all the strategies that can be employed and when to employ them. There are many theories as to how traders can potentially get ahead of the market: and one of the most popular is the concept that historical actions over prices actually indicate future price movements.

The data that is gathered and could potentially be used to indicate activity in the future is known as a technical indicator.

What are forex technical indicators?

Generally, forex technical indicators are based on mathematical calculations and algorithms. The idea is that by analysing these patterns it could be possible to discover the ideal times to sell or buy a currency.

There are many different varieties of technical indicators used by forex analysts. These include:

SUPPORT AND RESISTANCE

– When a currency makes movements in a specific direction it will eventually reach a peak and then start to fall. In the industry, this is referred to as its resistance level. Meanwhile, if it heads in the opposite direction it will eventually reach its lowest point – known as the support level – before it starts to climb again.

– On occasions when the market passes the resistance level this is referred to as a new support level – while when a support level is passed, this is known as a new resistance level. These resistance and support levels often indicate entry points and pivots within the marketplace.

MOVING AVERAGE

– Some calculations are made by evaluating closing prices and time periods and then dividing them by the number of prices which are used within the calculation. This is supposed to show the average price over this time period.  So, in the case of a five day moving average, five closing prices would be added together and then divided into five parts.

– There are several different types of moving averages in the forex markets. These are: weighted moving averages; exponential moving averages; smoothed moving averages; and simple moving averages. Each is based on a weight coefficient formed with the latest data.

– The idea of a moving average is to establish support and resistance. This can highlight the direction of a trend as well as volume fluctuations and market entry points.

– A technical indicator’s direction will show the market’s direction: whether it is a bullish or bearish trend.

– When averages are featured on a chart then the further they are apart, the stronger the indication of a clear trend.

– On occasions when averages actually intersect, a change is indicated.

RETRACEMENTS

– One of the most popular forex technical indicators is the Fibonacci Retracement indicator. It is a tool that looks at support and resistance levels based on trades from the prior day.

– It is possible to view retracement levels by creating trend lines between each extreme point and then splitting distances based on percentages.

– There could be as many as 13 lines on the Fibonacci Retracement – to find this you need to examine the swing highs and swing lows on the system.

OSCILLATORS

– Highlighting whether an instrument has been bought or sold too much, oscillators show changes in trends in the forex markets. They give traders the opportunity to assess when changes are likely to occur while also establishing entry points for the market.

– With an RSI indicator, the trader can examine the current state of the market – including whether it has been overbought, oversold or whether it is stable. When it reaches the overbought zone and then moves back to the middle, it is likely that prices will follow the same pattern. On the flipside meanwhile, if the indicator moves to an oversold mark before returning to the middle, then this movement is also likely to correlate.

– Another technical indicator is the stochastic oscillator which is based on trending in the forex markets. On occasions when each line tops the upper zone and then returns to the middle, chances are that rates will move the same way. However, when both lines reach this bottom point before returning, rates are likely to follow.

So which forex technical indicator will traders use?

In theory, interpretations of forex technical indicators should be the same no matter which asset a trader chooses to monitor. However, there are some techniques which should be considered closely when analysing the forex markets:

Minimal rate inconsistency: It is unusual for inconsistencies to last for any lengthy period because there are so many significant companies on the forex market including hedge funds and banks. Technical indicators will leap forward at this point, optimising the chance for a trader to see when a rate has been mispriced.

Range or trend: The aim of forex technical indicators is to judge the direction of trends before they occur. Trend lines are often drawn to connect historical points and indicate why a rate may have been restricted from reaching lower or higher levels.

Generally speaking, the greatest trends occur among leading currency pairs – such as EUR/USD, USD/JPY, USD/CHF and GBP/USD. The pairs that usually have the highest chance of becoming range bound are currency pairs which do not involve the US dollar: known as currency crosses.

PLEASE NOTE: These guides are meant to offer a general outline of some key forex-related areas. They are not to be constituted as financial advice and the strategies should only be considered by professional traders in selected circumstances. If you are considering entering the forex trading markets, seek independent financial advice first.