When you begin your journey of becoming the next expert in forex training, loads of different trading strategies bombard you. It’s easy to feel lost and confused. Most of these trading strategies used technical indicators and analysis, while others depend on radical news.
Most novice traders use technical indicators as they’re a bit easy to interpret, and they appear correct on the chart. This article will focus on the most popular technical indicators and how accurate they’re.
Knowing when and how to use them can pique you from experienced forex into one of the most successful forex traders of our time.
Forex Technical Indicators Explain
Forex technical indicators are mathematical tools that scrutinize each of the following items;
- Open price
- Closing price
In other words, technical indicators are stats of past financial market data framed vertically as valuable chart patterns.
Most forex traders use these statistics extensively when performing their technical analysis to foretell the currency trends.
The two main types of technical indicators are
1. Trend following indicators such as Bollinger bands and moving averages.
These technical indicators show the strength and the direction of the existing trend.
Oscillators are forex indicators that differ between two points on a graph used for showing when securities are oversold or overbought.
The most common oscillators are
- MACD ( moving average convergence difference)
- Stochastic oscillator
- Rate of change
- Relative strength index (RSI)
- Slow stochastic
It’s a good idea to use a mix of indicators and trend following indicators to help you make the appropriate trading decision.
Always bear in mind forex technical indicators are determined by calculating the past price feeds. All these indicators are derivative of similar data- close, open, low, high.
All data in your trading platform contain these pieces of information. Technical indicators receive similar data. So, it’s safe to say that they are almost the same.
Let’s see how each of these oscillators function.
The momentum oscillator is used for measuring the amount a specific security’s price has shifted over a particular time.
To get a momentum oscillator, divide the current price by the previous period’s worth and multiply the quotient by 100. You’ll get an indicator that swings around 100.
Most forex traders use momentum indicators to understand the rate or speed at which the security’s price is changing.
You use momentum indicators with other trading tools as they do not function to determine movement’s direction, but only the exact timeframe when price changes are happening.
Momentum indicators show the price movement over time and how strong those movements are/will be, regardless of the direction the price moves, up or down.
Momentum indicators are beneficial because they assist the analysts and traders where the financial markets will reverse.
These points are easily identified via divergence between momentum and price movement.
As momentum indicators display the relative strength but omit the price movements directionality, these indicators are used in combination with other indicators such as moving averages, which indicate direction and price trends.
Rate of Change Oscillators ( ROC)
ROC are momentum indicators that display price movement over a specific period. These indicators also determine how strong each of the actions are/will be whether the price direction moves down or up. Know that the security prices are going up if the ROC stays positive. Similarly, understand that the prices are coming down if ROC is negative. ROC goes to the positive side as an advance keeps accelerating. It then dives even deeper into the negative boundary as the decline keeps on accelerating.
The upward territory is missing on ROC, but the advance isn’t restricted. However, the downside limit is present. In simple words, ROC offers easily identifiable extremes that signify oversold or overbought conditions.
How to Identify trends
Although momentum oscillators are suitable for zigzag market trends, you can also use them to determine trends’ general direction.
In a year, there are 250 trading days. You can split them to 250 days per half-year, sixty-three days per quarter, and exactly twenty-one days each month. A trend reversal begins with the shortest timeframe and then slowly spreads to other given timeframes.
Generally, the long term trend is up for grabs when 250 days and 125 day ROC is positive. This means the prices are a bit higher now than they were 11 to 15 months ago.
Long trading positions taken six to twelve months prior would have been very profitable, and buyers would be thrilled.
Most new online traders have a vision of getting rich in just a matter of days. But the reality is becoming a successful forex trader takes a lot of time, involves practice, patience, and hard work. However, with the right strategy and time, you can master it and go laughing all the way to the bank.