Summary Common Indicators

Summary Common Indicators

Everything you learn in this forex course is one more tool that you add to your toolbox. Your tools will make it easier for you to build your strategy as a Forex trader in the Forex market.

We will review the most common technical analysis indicators we have discussed so far:

Bollinger Bands

• They are used to measure market volatility.


• They act as mini levels of support and resistance.


• There are rebounds in the bollinger bands: It is a strategy that is based on the price tends to return to the middle of the bollinger bands. It is bought when the price reaches the lower band and is sold when the price reaches the upper band.


• When the bollinger bands are very close, it is used as a strategy to predict a change in the market. When the bands are very close, it means that the market is very still and that a break up or down is imminent. Once this happens, we can open an operation to the side to which the price has made its move.

MACD

• It is used to detect the formation of a trend early.


• It consists of two moving averages (one slow and one fast) and vertical lines called histogram, which measure the distance between the two moving averages.


• On the contrary to what many people think, these moving averages, are not moving averages of the price, are moving averages of other moving averages.


• The bad thing about the MACD is its delay, since it uses many moving averages.


• One way to use MACD is to wait for the fast line to cross above or below the slow line and open an operation according to that movement because it indicates or signals a new trend.

SAR Parabolic

• This indicator is made to detect when a trend is reversed.


• It is the easiest indicator to interpret because it only gives signs of purchase or sale.


• When the dots are above the candles it is a sell signal.


• When the dots are under the candles is a sign of purchase.

Stochastic

• It is used to indicate conditions of over-purchase or over-sale in the market.


• When the moving average lines are above 70, it means that the market is in over-purchase and we must sell.


• When the moving average lines are below 30, it means that the market is oversold and we must buy

RSI

• It is similar to stochastic as it also indicates conditions of over-purchase and over-sale.


• When the RSI is above 80 it means that the markets are in over-purchase and we must sell.


• If the RSI is below 20, it means that the market is oversold and we must buy.


• The RSI can also be used to confirm trend formation. If you think a trend is forming, then wait for the RSI to be above or below 50 (depending on whether you are looking for up or down trend), before opening an operation.

Remember that each indicator has its imperfections and you should not follow them to the letter. This is the reason why so many operators choose to combine different indicators to contrast with each other.

As you progress in your learning as a Forex trader, you will know which indicators you like the most and how you can combine them.

We know that this has been a very long lesson and we encourage you to re-read everything that has not been completely clear to you. Once you have fully understood the concepts about the indicators, you can open a demo account with an online broker and start practicing with them on the trading platform; Studies the reactions of indicators to price movements very well.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.