Forex Technical Analysis

 

Using Technical Analysis Tools to trade the Forex market is a complicated but common task for every Forex trader. Here are some of the major technical indicators concerning the Forex Market. 

1) Relative Strength Index (RSI):

The RSI measures the ratio of upward and downward movements on a scale of 0-100. If the RSI is 70 or higher, it’s a signal that the market is overbought (that means prices have risen more than market expectations). If the index is 30 or less it’s a signal that the market is oversold (that means that prices have fallen more than market expectations).

When trading Forex intraday, it is recommended using RSI on the 5-Minutes chart. It is recommended also to seek for divergences between the price chart and the RSI chart (H1, H4, D1). These divergences may provide very reliable reversal signals.

Key Tips when Trading with RSI:

(i) Use RSI(21) instead of the standard settings of 14-periods 

(ii) Divergences between the price chart and the RSI chart can provide powerful reversal signals

(iii) For evaluating key price reversal/continuation you can use RSI(21) on the H4 and D1 charts

(iv) When evaluating short-term overbought/oversold levels you can use RSI(21) on the 5-Minutes chart

(v) In order to perfectly time your trades, wait for RSI(21) to reverse after reaching an overbought/oversold level (20/80) 

 

2) Stochastic Oscillator:

The Stochastic Oscillator is used by Forex traders to indicate an overbought or oversold Forex exchange rate on a scale of 0-100%. The index is based on the assumption that in strong-upward-trend-period closing prices tend to be concentrated at the highest point on the scale shown. Conversely, if prices fall in a strong downward trend, closing prices tend to move towards the lowest point of that particular period. Stochastic calculations produce two lines (% K and % D), which used to define the levels of an overbought/oversold Forex exchange rate.

► Technical Analysis Indicators at the Trading Center

3) MACD (The King):

MACD indicator involves plotting two momentum lines. The MACD transforms two trend-following moving averages into a single momentum oscillator by subtracting the longer moving average from the shorter moving average. If the MACD and trigger lines cross, is taken as a sign that the trend is changing.

 

Use the MACD on H1 and longer timeframes in order to limit false signals. It is recommended also to seek for divergences between the price chart and the MACD chart (H1, H4, D1). These divergences may provide very reliable reversal signals.

Tips when trading with MACD:

(i) Prefer to use the MACD using its standard settings (12,26,9)

(ii) Divergences between the price chart and the MACD histogram can provide very important price reversal signals

(iii) MACD signals are more reliable in longer timeframes (H1 and above)

4) Fibonacci Numbers:

Fibonacci Numbers are the sequence of numbers where each number value is equal to the sum value of the previous two numbers. These numbers are 1, 2, 3, 5, 8, 13, 21, 34, 55 etc. The ratio of any number to the next larger number is 0.618, which is the popular regression of Fibonacci (Fibonacci Retracement Number). Fibonacci numbers are widely used in Stock Indexes technical analysis models.

 

► Read More on TradingFibonacci.com

 

5) Gann Numbers:

W.D. Gann used angles in charts to define support and resistance areas of trading prices and predict the times of future trend changes.

 

 

6) Elliott Waves Theory:

Wave theory of Elliott is an approach to predict future price movements based on past wave patterns. A great wave pattern Elliott consists of a five-wave advance followed by a three-wave decline.

 

7) Gaps (Gaps):

 

Gaps are blank areas in the bar chart where no transactions have taken place. An up gap is formed when the lowest price on a trading day is higher than the highest price of the previous day. A down gap is formed when the highest price for the day is lower than the lowest price of the previous day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. It usually signals the beginning or the end of a significant price trend.

 

8) Moving Averages and Trends:

Forex moving averages are used to smooth price volatility, to confirm possible trends and to define support and resistance levels. It is recommended to use the 50-day and 200-day Movings Averages.

Tips when trading with MAs:

• (i) For generating reversal trade signals, focus on the crossovers between the price, and EMA(50), EMA(100), EMA(200)
• (ii) You can use the Fibonacci numbers as the periods of moving averages (8, 13, 21, 34, 55, 89, 144, 233)
• (iii) Moving averages cannot create an independent technical analysis forecasting system. Combine MAs with other technical analysis tools

 

 

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