This is a concise list with emphasis on most important Fx Technical Indicators as there is a large number of indicators out there. As usual, you will want to keep it simple with your use of tools in your Fx Technical Analysis.
Moving Averages is among most used Technical Indicators used in Fx Trend Analysis. Also is one of the simplest Technical Indicators. Core of this indicator is to reduce spike fluctuations from one Japanese Candlestick to another which makes it easier to spot emerging trends.
SMA – Simple Moving Average Indicator
It has very simple visual layout and traders can very easy analyse prevailing trends by the direction of Simple Moving Average.
Word of caution: SMA is lagging Technical Indicator which means it might not react in time to action on the market. It is not to be used on shorter time period charts
EMA – Exponential Moving Average Indicator
Exponential Moving Average Indicator solves two main lacks of SMA – it equally weights all Japanese Candlesticks and adjusts with every new bar. It has cumulative method of calculation, taking the previous bars into consideration when calculating EMA value.
Although, all previous bars are taken in consideration, older bars are losing on relevancy with time passing. Putting more weight on recent price change and quicker response to price action than SMA makes this indicator suitable for trading shorter period time charts.
Relative Strength Index (RSI) Technical Indicator
RSI is maybe the most popular and most important trend momentum Technical Indicator. It measures direction of currency rate movements.
Most important use of RSI Indicator is to determine when Fx market is in the overbought or oversold level. Among many Indicators made by Welles Wilder. It measures internal strength of currency pair and compares the magnitude if its recent gains against recent losses.
That information is then transformed into number ranging from 0 to 100. Important levels are 30 and 70. Once the Relative Strength Index rises above 70 the market is considered to be in overbought condition and price is expected to drop. Vice versa, when RSI Indicator line falls below 30, market is in oversold condition and traders are expecting Bulls to prevail on the market and price to rise.
Word of caution: FALSE buy/sell signals can be created by large price movements and best practice is to use RSI indicator with other technical indicators.
Trading Relative Strength Index Divergences
Creator of RSI believed that divergence between Relative Strength Index and Fx market price action is a strong indicator that market is turning.
Bearish Divergence – currency pair price makes new high but Relative Strength Indicator makes LOWER high, failing to confirm price.
Bullish Divergence – price makes new low – RSI Indicator makes HIGHER low thus failing to confirm.
RSI DIVERGENCE OCCURS AT MOST SIGNIFICANT TURNING POINTS
When Divergence begins to show up after good directional price move, look for a turning point.
Parabolic SAR (Stop and Reversal) Indicator
Parabolic SAR tells us about price stop and reverse points and trend direction. It is represented by set of dotted lines, with every dot representing certain time period, relative to the currency pair price. Traders use Parabolic SAR dots to generate buy or sell signals, depending on the dot’s position relative to the price.
Parabolic SAR dot is below the currency pair price – Bullish Parabolic SAR Signal, meaning the momentum is expected in UPWARD direction
Dot is above the price – Bearish Parabilic SAR Signal, downward momentum is expected.
Word of caution: Parabolic SAR is not to be used as a stand-alone indicator as it often creates FALSE SIGNALS in periods of currency market consolidation. This indicator shows its best side during strong trend periods.
MACD Technical Indicator
MACD stands for Moving Average Convergence Divergence and it is simple and most effective trend momentum indicator. What MACD does it turns two moving averages into momentum oscillator. It does it simply by subtracting longer Moving Average from shorter Moving Average.
MACD fluctuates above and below zero line as Moving Averages Converge, Diverge and Cross.
MACD is calculated by subtracting 26 day Exponential Moving Average (EMA) from 12 day EMA. Signal MACD Line or 9 day EMA is plotted on top of MACD and it is functioning as effective buy/sell trigger signal.
How to Interpretate MACD
MACD Crossovers – when MACD falls below signal line it is a Bearish signal, indicating to go short, to sell. When MACD rises above signal line, go long, buy.
Word of Caution: Wait for CONFIRMED cross above signal line before entering the position to avoid false signals.
MACD Divergence – when price diverges from MACD it signals the end of the current price trend.
Word of caution: MACD is not suitable for identifying overbought/oversold levels.
Stochastic Oscillator Indicator
Widely used momentum indicator. It shows location of the close relative to the high/low range over a set number of periods. Its sensitivity to price movements is reducible by adjusting that time or taking the Moving Average of the result.
Fast Stochastic Indicator – more sensitive changes in price and will result in many signals. Since it is calibrated in the range from 0 to 100, overbought level is above 80 level mark and oversold below 20.
Crossovers above 80 level mark indicate potential shifting of the currency pair trend from the overbought levels.
Stochastic Oscillator Divergences
Used to foreshadow reversals. Divergences form when new high or low in the price is not confirmed by the Stochastic Oscillator.
Bullish Divergence – Price records new low but Stochastic Oscillator fails to confirm, recording higher low. This is indicating less downside momentum and possible Bullish reversal.
Bearish Divergence – Price records new higher high on chart, Stochastic forms lower high thus indicating there is less upside momentum, foreshadowing Bearish Reversal.
Word of Caution: Stochastic Oscillator Divergence is a WARNING SIGNAL, not a trade signal. Use it in addition to other Technical Analysis tools.
Average True Range Technical Indicator (ATR)
Average True Range Indicator shows the volatility of the currency market. It is a component of many other indicators.
It DOES NOT indicate price direction but it measures VOLATILITY of the market caused by gaps and limit moves.
Volatility – amount of price action present in the market. The more price moves up and down the greater is the volatility level of the market.
ATR Indicator is Moving Average of values of TRUE RANGE. It is the greatest of the following:
– Current high and low difference
– Previous closing price and current MAXIMUM price difference
– Previous closing price and current MINIMUM price difference
Average True Range Technical Indicator is usually based on 14 periods and it is calculated within a day, on weekly or monthly basis.
It provides PRECISE measure of current currency market volatility. It is very effective Fx Technical Analysis tool when used with other Technical Indicators.
Bollinger Bands Technical Indicator
BB helps us identify short-term price action and it consists of MA, Upper and Lower Band.
We get Upper and Lower Bands values by adding/subtracting standard deviation from the moving average.
It provides us with currency market volatility.
How to read Bollinger Bands
When bands expand the market is highly volatile, when they are close to each other there is low volatility level in the market. Rule of the thumb for Fx market is that periods with low volatility are usually followed by high volatility periods.
When the currency pair price moves above upper band the market is overbought, when below lower band – market is oversold. Best practice is to use Bollinger Bands together with other Technical Indicators.
Use this Technical Indicators list to cherry pick your tools for analyzing Fx market’s volatility, momentum and trend direction. Practice and experiment with these indicators to find the best Fx Technical Indicators combination that will accurately meet your Fx trading strategy.
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