Forex Technical Indicators That All Traders Should Have in their toolbox

Forex Technical Indicators That All Traders Should Have in their toolbox

 

One of the basic types of tools that a Forex trader needs to have in his toolbox is technical indicators. Technical indicators are used to detect trends as well as predict future price activity by looking at patterns that have happened in the past. However, they are most effective for short-term price movements rather than long-term trends, since they do not take into account any of the fundamental factors that could affect currency values. The most successful traders familiarize themselves with these indicators since they are can provide signals as to when a trader should open and close a position and enter the market.

Here is a brief overview of some of these indicators.

Bollinger Bands: – This indicator was developed by John Bollinger in the 1980s and measures volatility in the markets. It consists of two bands, which contract when there is less volatility and expand when volatility increases. Since the price of a currency tends to return to the middle of the bands, traders can open a trade when the price hits the top of a band, since they know it will likely start to go down, since this band acts like a resistance level.

RSI: – The Relative Strength Index identifies when the market is overbought or oversold and ranges from 0 to 100. When the RSI is at less than 30 then the market is oversold while if it is above 70, it is overbought. Generally it is used to confirm trends. For example, if the RSI is increasing, then the market is on an uptrend, while if it is falling, it is on a downtrend.

MACD: – The Moving Average Convergence Divergence (MACD) is an indicator that is also used to identify trends. It consists of two moving averages, one that moves faster and the other slower, and a histogram that computes the moving average of the difference between the two trends.

They are also used to identify trends by looking at the crossover of the two moving averages. When a new trend forms, the fast MA will be the first to react and start to cross the slow MA. However, the two lines will eventually diverge as the trend strengthens. This is confirmed by the histogram, which will disappear as the lines cross and then grow bigger as the trend gets stronger.

The major disadvantage of the MACD is that it tends to lag behind price movements, since it is just the average of historical data. Still, the MACD is one of the most popular indicators among traders.

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