Where to Start?
Many new traders begin their Forex journey with technical indicators. The idea of using a tool to help you time market entries and catch powerful reversals is an attractive one, however, with so many indicators out there it can be daunting for new traders learning which ones to use and how to use them.
In this article, we are going to look at our top four forex indicators for 2017 to help you get started with your trading, and for those of you who have already been trading for a while, hopefully, this will remind you which indicators you should be focusing on.
The Relative Strength Index
The RSI indicator is a classic Forex indicator used to measure momentum in the market. The indicator measures the strength of recent gains against the sizes of recent losses with a view to identifying price as either overbought or oversold. This can be a brilliant tool for helping traders identify the period when the price is vulnerable to a reversal and works particularly well in range bound markets as well as for entering on corrections during trends.
The chart above gives a perfect example of how the RSI indicator can help traders time the market. USDJPY is clearly moving in a bearish trend, and as we such we want to look to sell USDJPY when the indicator shows that momentum is overbought. Notice how when the market corrects higher within the trend, the correction ends once the RSI indicator moves into overbought territory. The highlighted sections show periods where traders could use the RSI indicator to set shorts during the bearish trend as the correction ends and the trend resumes.
The stochastic indicator is another fantastic tool for helping traders measure momentum in the markets and find entries at points where momentum is overstretched, and the price is vulnerable to a reversal. This indicator measures price against the relationship between price and the high and low of a range over a certain look back period, again identifying momentum as either overbought or oversold.
Just like the RSI indicator, this can be a superb tool to help traders refine their entry points and better capture market reversals. The stochastics indicator actually includes two oscillating lines which provide even more accurate entry points. Another fantastic way to use momentum indicator such as this is to identify divergence this is where the indicator isn’t supporting the moves made by price and as such suggests that a reversal is likely.
In the chart above you can see a great example of bearish divergence offering a selling opportunity. As price is rising notice how the stochastics indicator is putting in higher highs but at the last two highs, you can see that the stochastics indicator actually put in lower highs. This shows that bullish momentum is fading from the market as buying pressure fades. Traders can then sell as price breaks below the support level shown in red.
Moving Average Convergence Divergence
The MACD indicator is an extremely popular tool for helping traders identify trend direction and time their entries. The indicator measures the difference between a longer term and shorter term moving average to class price as either bullish or bearish. When the histogram is above the centre line that means that the market is expected to rise and when the histogram is below the centre line that means that the market is expected to fall. The actual crossing of the centre line can be used by traders as an entry point.
In the chart above you can see how price keeps rising while the histogram is above the centre line but then as the histogram falls below the centre line price trends lower. The highlighted area shows where the histogram changes from positive to negative which can be used as a great short entry.
Parabolic Stop and Reverse
The SAR indicator is another fantastic tool for highlighting momentum reversals in the market and can be extremely effective not just in helping traders find fantastic entries but also in helping traders manage their trades and trail their stops.
When the price is rising, and expected to continue rising the indicator will place dots below price which highlight where price must go to confirm a reversal. If price breaks down below the dots this means a bearish reversal is underway. Similarly, if the price is selling off and expected to continue falling the indicator will print dots above price. If price breaks above these dots it signals that a bullish reversal is underway.
The chart above shows you just how well the indicator captures reversals in price and how useful it can be for helping traders find entries at key turning points. In terms of trailing stops: if a trader is long, they can trail their stop up under each new dot below price because they know if price breaks below the dots then a reversal is likely. Similarly, if a trader is short, they can trail their stops down above each new dot above price because they know if price breaks below the dots a reversal is likely.
These are just four of the many indicators offered on the Orbex platform, and hopefully, this will give you some ideas about how you can get started using technical indicators.