E
verything you learn about trading is like a tool that is being added to your forex trader’s toolbox.
Your tools will give you a better chance of making good trading decisions when you use the right tool at the right time.
Popular Forex Chart Indicators
Bollinger Bands
Bollinger bands are an indicator that looks like an envelope curve, developed by John Bollinger, and allows you to compare the dynamics of certain price levels over a period of time.
In other words, it measures the market’s volatility. They could act like mini support and resistance levels.
Bollinger Bounce
The theory of this strategy is that the price tends to always return to the middle of the Bollinger bands.
You buy when the price hits the lower Bollinger band.
You sell when the price hits the upper Bollinger band.
This strategy is appropriate for using when the market is ranging and there is no clear trend.
Bollinger Squeeze
It usually means that a breakout is getting ready to happen, because the market is quite and the bands are squeezing.
If the candles start to break out above the UPPER band, then the price will usually continue to go UP, so we go long.
If the candles start to break out below the LOWER band, then price will usually continue to go DOWN, so we go short.
MACD
MACD is used to catch trends early and can also help us spot trend reversals.
It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
MACD’s downfall is its lag because it uses so many moving averages.
One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.
Parabolic SAR
Parabolic SAR is an indicator that can help us define where a trend might be ending.
It places dots, or points, on a chart where there will be a potential reversal in price movement.
Dots below the candles = BUY signal.
Dots are above the candles = SELL signal.
You should use it only in markets that are trending, which have long rallies and downturns.
Stochastic
The stochastic indicator, based on the momentum of the price, is used to predict when a price trend is about to end.
Like RSI, here too the values show us when an asset is oversold or overbought.
Key levels are 20 and 80.
Levels below 20 suggest that the market is oversold,so we need to buy.
While levels are above 80 indicate an overbought market, therefore we need to sell.
Relative Strength Index (RSI)
RSI is similar to Stochastic as it displays overbought and oversold conditions in the market.
It is extremely popular among traders, as it has many applications and the benefits:
- It can be used on any financial instruments and time frames
- Helps identify price reversal points
- Reports levels of overbought / oversold
- It can form graphic patterns that are difficult to see on the price chart
- Can be used to confirm price models
- Very easy to use and does not burden the chart
If the readings are below 30, the market is oversold, which could indicate that it is a good time to go long.
If the readings are above 70, the market is overbought, whicheveals that a reversal is coming and it is time to go short.
Another useful side of this indicator is that it can be applied to give a confirmation for trend formations. Wait for the RSI to go below or above 50 and then enter a trade.
If the RSI is above 50, then a possible UPTREND might be forming.
If the RSI is below 50, then a possible DOWNTREND might be forming.
William %R
The Williams Percent Range, also called Williams %R, is less popular than the previous indicators.
The meaning of the indicator is to measure the ability of bulls and bears to close prices every day near the edge of the range over the past period.
In other words, it is a momentum indicator that compares the closing price to the highest and lowest prices of a given time period (typically 14 days period).
Its main function is to show areas of overbought and oversold conditions.
The Williams Percent Range indicator can also accurately predict price reversal.
The values of the indicator in the range from -80% to -100% indicate an oversold status.
The values ranging from -0% to -20% indicate that the market is overbought.
A reading below -80% will mean that the market is oversold.
REMEMBER: If there is an area of overbought or oversold, it does not necessarily mean that the price will reverse.
“Overbought” simply expresses that the price is near the highs of its recent range.
The same goes for oversold. “Oversold” means the price is near the lows of its recent range.
Average Directional Index (ADX)
ADX is the short-term indicator (an oscillator) of the average direction of targeting, thanks to which, currency traders can determine both the direction and strength of current market trends.
The indicator can vary from 0 to 100.
If the baseline of the ADX rises above the line of 50, it means that the trend is constantly increasing and strong.
But if the ADX starts to fluctuate below the 20 line, it means that the trend is likely to reverse or at least stop for a while as it gets weaker.
Traders also use ADX as a confirmation whether the pair could possibly continue in its current trend or not.
ADX can be used to identify as well when one should close a trade early. For instance, when ADX starts to slide below 50, it indicates that the current trend is possibly losing steam.
Ichimoku Kinko Hyo
Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance.
Ichimoku translates to “a glance”, kinko means “equilibrium”, while hyo is Japanese for “chart”.
Putting that all together, the phrase ichimoku kinko hyo stands for “a glance at a chart in equilibrium.”
If the price is above the Senkou span, the top line serves as the first support level while the bottom line serves as the second support level. If the price is below the Senkou span, the bottom line forms the first resistance level while the top line is the second resistance level.
The Kijun Sen acts as an indicator of future price movement. If the price is higher than the blue line, it could continue to climb higher. If the price is below the blue line, it could keep dropping.
The Tenkan Sen is an indicator of the market trend. If the red line is moving up or down, it indicates that the market is trending. If it moves horizontally, it signals that the market is ranging.
The Chikou Span is the lagging line. If the Chikou line crosses the price in the bottom-up direction, that’s a buy signal. If the green line crosses the price from the top-down, that’s a sell signal.
Each chart indicator has its imperfections. This is why forex traders combine many different indicators to “screen” each other.
As you progress through your forex trading career, you will learn which indicators you like the best and can combine them in a way that fits your forex trading style.
