Friday, August 24, 2012

4 best indicators for forex FX trading

A successful FX trader is the one that does not rely on a single indicator, and will have the patience to enter and exit a position, we will talk here about 4 categories of indicators that everybody MUST know in charts analysis and forex trading:

Category 1: Trend Identification indicators: 
Before entering a trade, Forex trader should identify the trend for the period of time they chose, it will tell you whether to enter long or short position (buy or sell).
-Moving average, you can clearly see the trend using it, and a crossover (when 2 moving average cross each other) indicates a possible change in trend
-Exponential moving weighted average: this is a very good trend indicator for short term traders, indeed it puts more weight on recent datas, so it shows the trend for short time-frame

There is no best moving average set up, it really depends on  your trading time-frame.

On this graph both the moving average and MACD confirm a Downtrend, so we will SHORT
Forex trading FX indicators, MACD and moving average

Category 2: Trend Confirmation indicators:
As I said before, you can never rely on 1 indicator to make a decision, we will use here the MACD indicator (moving average convergence divergence) which is widely used by traders.

-If Moving average gives a bearish signal, and MACD are negative : Confirmed  downtrend.
-If Moving average gives a bullish signal, and MACD is positive: Confirmed Uptrend.

Category 3:  Overbought/Oversold indicators:
Now that you know the trend, you need an indicator to enter the market at the right time and limit the risk, we will use what we call an Overbought/Oversold indicator the RSI (Relative Strength Index)
The RSI ranges from 0 to 100, and we will set the 2 limit lines at : 20 or 30 for oversold and 80 or 70 for overbought.

-If MACD+Moving Average confirmed a downtrend and the RSI is over 80 or 70 (overbought) then it is a SELL signal
-If MACD+Moving Average confirmed a uptrend and the RSI is less than 20 or 30 (oversold) then it is a  BUY signal

The RSI was inside the overbought area (left of the chart) so we short at that time

Forex trading FX indicators, RSI relative strenght index
 Now that you have entered the market you need an indicator to tell you when to exit your position:

Category 4: Profit Taking indicator 
Many forex forums give you 100 ways to enter the market, but don't tell you anything about how to exit your positions, in that category you can also use the RSI indicator to determine when to exit your position if it goes into the oversold or overbought area.

Another indicator for this indicator are Bollinger Bands
-If  you entered a Buy position and the price reaches the upper band, then the bollinger bands act as a resistance and you should sell at that time.
-If you enter a Sell position and the price reaches the lower band, then the bollinger bands act as a support and you should exit your position.

The price line crossed the lower bolling band, so we liquidate the short position we took earlier.
Forex trading FX indicators, RSI relative strenght index and bollinger bands


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