Many Forex traders make use of Forex charts, a graphed series of technical indicators, to help them decide on their trades. In order to interpret these charts well, the students of Forex investing must be able to read those indicators.
Fortunately, it isn't necessary to know exactly how to calculate them in order to use them as Forex softwarescan do that for you. But, it's helpful to have some idea of how they are arrived at, and what they mean, in order to evaluate their worth as trading tools.
Keep in mind, however, that none of the indicators - taken alone - tell the whole story. Nor do all of them together make one certain. Indicators are just that, they indicate. They do not predict with certainty. No mathematical tool used in Forex trading will do that. Beware of hyped promises.
Following are some of the more commonly used.
Moving Average
Just as prices can be charted so can average prices. And, like the prices themselves, the averages change over time. The two most commonly calculated are the SMA (Simple Moving Average) and EMA (Exponential Moving Average).
The SMA is the average of prices taken at specified intervals, say an hour or a day. Each price is weighted equally in calculating the average. The more complicated EMA weights some prices more than others, on the premise that some are more relevant. Recent prices are considered more telling than those further back, hence these are weighted more in the calculation. For example, a 10-day EMA calculation will weight the last days more heavily than the first days.
Many software tools will indicate a buy signal when the current price rises above its moving average, since this suggests a rising market. A sell signal may be triggered when the price falls below the moving average.
Bollinger Bands
Just as in futures and options trading, Bollinger Bands are a commonly used indicator. While their calculation involves some heavy-duty mathematics, their interpretation is considerably easier.
The bands are calculated as standard deviations above and below a simple moving average. The width of the bands will vary depending on volatility. As volatility rises, they become wider. As volatility decreases they narrow. Prices tend to stay within the upper and lower bands, with sharp price changes tending to occur after the bands tighten. If prices move outside the bands, the current trend will tend to continue.
A sell signal is suggested when the current price is above the moving average, close to the upper band. A buy signal is indicated when it moves to the lower band.
RSI
The RSI, or Relative Strength Index, is a value between 0 and 100. A number above 70 usually suggests that a currency is overbought and therefore due for a price reversal. A value below 30 indicates a currency is oversold.
As a price is making a new high, but the RSI fails to surpass its previous high, the trend is said to 'diverge'. This often indicates an impending reversal of the trend. When the RSI dips below a recent bottom, it is said to have executed a 'failure swing'. That move is seen as tending to confirm the impending price reversal.
There are several other common indicators, including MACD (Moving Average Convergence/Divergence), Momentum, OBV (On Balance Volume), Money Flow Index, Parabolic SAR, Stochastic Oscillators and dozens even more esoteric.
All these were developed as statistical tools to help predict prices and trends. But keep in mind that, though some technical analysts claim to eschew looking for causes, all of them are based on assumptions when used as technical indicators.
As with any tool, they should form part of a strategy for trading. They should not be used as a substitute for studying the market and using proper Forex risk management. To learn more about
Currency Exchange
, I would recommend this book by Jermaine
Quick Forex Tip #7
Like other types of investment, you must be aware of what kind of ground you are stepping into. In other words, before getting a live Forex trading account, you must be properly educated first about the background of Forex trading. You must learn how you will maximize your earning potentials as well as decrease the risk that you are into through practicing with free demo accounts. Moreover, you must have a trading system to follow and the necessary tools that will help you analyze varying conditions of the Forex market to position yourself on the profiting aspect of a certain trade. |
Quick Forex Tip #8
In Forex market alone, there are HUGE major players (such as Central banks, commercial banks and companies) partaking on the $3 trillion worth of daily turnover. With a large number of Forex players, there is really a need in switching from manual to automated Forex trading system.
There are two types of automated Forex trading system. They are:
1. Desktop-based system- all Forex-related data are stored on your desktop’s hard drive. This system is unpopular to Forex traders because all data are susceptible to computer virus contamination and other security problems. Worse, when the computer malfunctions, all essential information might be lost and cannot be retrieved (unless you have some back-up files of your own). However, it is little expensive compared to the other types of automated trading system.
2. Web-based system- the security of your Forex account and other data are provided by your web-based provider. These are hosted on secured servers. It is also convenient in the sense that there will be no software required and it is universally compatible with your Internet browser. |
Quick Forex Tip #9
Forex trading is getting more and more popular each day. Besides, who wouldn’t want to trade in the largest and the most liquid financial market in the world? Trading in Forex will certainly give you the opportunity to earn a lot of money. However, trading in this ever liquid market also has its risk. It is a fact that many people who traded in Forex lost a substantial amount of money and some of these people are seasoned traders.
This is why it is very important for you, as a beginner trader in the Forex market, to have the proper knowledge and education on how to trade in the Forex market. Firstly, there are hundreds or even thousands of available websites in the internet that offers Forex education. Some of these websites offer dummy Forex trading where you can practice trading in the Forex market using dummy money. |
