Technical analysis is a pillar of Forex trading. With its help, traders can determine the main trends turning it into a firm basis for their future strategies. However, a lot of beginners get lost in the variety of indicators brokers provide. Do you need to choose only one? Or maybe two? All of them? How many are too many?
There are a few basic options that you need to master before you move on when it comes to the choice. Most of the indicators are based on the same principle, so once you know the origins, it would be easier for you to navigate the rest.
You will need to learn about those three indicators:
- Moving Average (MA)
- Relative Strength Index (RSI)
You can find the current trend, support and resistance levels and determine when it’s best to enter and exit the market thanks to these indicators.
This indicator smoothes out the price data for a selected timeframe and lets you see the average price for that exact period.
As you might notice, the chart can have a lot of minor price movements that won’t be relevant to your analysis but will still distract you - that’s where your MA comes in handy.
MA can show you a clearer picture of a trend since it follows past price movements. The best thing about this indicator is that you can customise it to suit your needs. Select the time period of 15, 20, 30, 50, 100, and even 200 days. The lesser the number, the more sensitive this indicator is to price movements. For a longer-lasting trend, choose bigger values, and vice versa if you want to observe the trend within a shorter time.
Once you have learned enough about this indicator and want to learn more, you can also try using Bollinger Bands.
Relative Strength Index (RSI)
This useful technical analysis tool is an oscillator - a type of indicator that shows you when the asset is overbought and oversold. Once the price reaches its peak, it will most likely go down, and RSI will help you determine this point.
RSI looks like a line graph that moves between two extremes - from 0 to 100. Following the line, you can determine the level of the price at the moment. So, when does the trend reverse?
It is generally considered that once the line of RSI goes lower than 30, the asset is oversold, and the price will most likely grow. If RSI shows you the value of 70 and more, it is a signal of an overbought asset - get ready for the price to go down.
This indicator, just like all others, will not give you a clear signal and won’t guarantee that the price will behave in exactly this way. However, it will show the most likely pattern that you need to take into consideration once you plan your trading routine.
Stochastic is also an oscillator that will show you when the asset is overbought and oversold. But what makes it different from RSI?
Stochastic is a combination of the two previously described indicators. So it is based on average prices within a period of time and the price movements between the extremes.
Stochastic has two lines:
- %K (fast Stochastic) shows you the average price movement within the previous 14 trading sessions
- %D (slow Stochastic) is a 3-period moving average of %K
So what do you do with them, and where do you find the overbought and oversold levels?
The most precise indicator of price reversal is:
- Two lines (%K and %D) cross over
- The point where those two lines meet is below 20 (oversold) or above 80 (overbought)
To put it shortly, if two lines meet above 80, it means that the price will go down soon. If they meet below 20, the price will go up.
These essential indicators will boost your trading routine and help you make weighted decisions once you learn how to read them. However, it’s important to remember that those indicators alone will not give you a 100% correct hint. Use them wisely. Remember - practice makes perfect!