Introduction
Many traders use different methods of technical analysis to predict price movements. Since the basis of forex market analysis is the price chart and it is nothing but price changes over time, many traders are interested in discovering calculations that can be used to predict possible price changes in the future according to the historical price data. These calculation and formulas are known as technical indicators.
Many indicators exist by default in trading platforms and many others are produced by traders and made available to other traders in the online libraries. In the continuation of this article, the most important and famous indicators will be introduced and the characteristics of each will be examined.
Reliable indicators in technical analysis
Before introducing the important indicators, it must first point out that sometimes the term oscillator is used in this category, which refers to the indicators that are displayed at the bottom or top of the price chart and their value oscillates between 0 to 100. In the following, the most important indicators are discussed and the characteristics of each are stated.
Moving Avera
Moving averages are one of the most important and famous indicators used in the forex market. There is an interpretation among experienced traders that states the price cannot deviate more than a certain limit from the average of its past values and if it deviates, sooner or later it will return to the average value. Moving averages, as their name suggests, are obtained by calculating the average price over several consecutive periods in the past. For example, the moving average of 14 periods is the result of the average price in the last 14 periods which, according to the timeframe of the chart, can be 14 minutes, 14 hours, 14 days, etc. Moving averages can be calculated as simple, exponential, weighted, etc.
Moving averages have many uses in technical analysis. Sometimes they are used as dynamic levels of support and resistance, and sometimes their combination in different periods and their cross with each other are used as a signal to enter the trade. But it is important to know that moving averages are delayed indicators, so the signals are accompanied by a delay. Therefore, it is possible that they may cause loss of profit or even cause losses and using it only as a signal to enter the transaction is not recommended.
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RSI
Another important and famous oscillator used in technical analysis is the RSI. It is safe to say that there is no trader in the forex market who has not used this indicator at least once or is not aware of its use in technical analysis.
This oscillator can be calculated and used for different periods of time. Simple and exponential type for short periods of time are not much different. But if it is used in long-term daily, weekly and monthly periods, it should be noted that in the exponential type, recent price data gets more weight, so it is more sensitive to the latest price changes and has more fluctuations.
Many traders use this oscillator to identify oversold areas. Of course, it has another more important use, which is known as divergence. That is, where the lows and highs in this indicator do not match with the price. For example, while the price is hitting higher highs and higher lows, the RSI makes lower highs and lows, which traders call this “divergence” and consider it a sign of a possible reversal.
Unlike moving averages, RSI is considered a type of leading indicator, that is, it somehow predicts the probability of a change in price movements and in this sense, many traders interested in. Of course, it should be noted that this feature, as well as it can make a good profit, may also cause losses due to a mistake in the analysis.
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MACD
MACD which stands for Moving Average Convergence Divergence, is one of the most popular indicators in technical analysis. This indicator consists of three elements: MACD line, signal line and histogram, which is calculated based on the difference of two moving averages and in a way expresses the price trend and its strength.
Traders use this oscillator in many ways from trend detection to trading signals. For example, the intersection of two MACD and signal lines is used as an entry signal. In addition, the combination of MACD with some other types of tools such as RVI and MFI is also used to identify the appropriate place to enter the trade.
Using to in/out positions
As mentioned before, one of the important uses of the technical indicators is to identify the right price for taking or exiting positions. MACD, RSI, moving averages, stochastic, etc. are among the important tools used in this field.
For example, in the MACD indicator, whenever the signal line crosses the MACD line, it is considered as a signal to enter the transaction and according to the direction of the MACD line crossing, the trader take position. To exit the trade, the intersection of these two lines in the opposite direction can be a warning to change the trend and thus signal exit from the transaction.
In RSI, the most important entry signal is the occurrence of divergence in the saturated zone. In other words, when the RSI enters the saturated buy or sell range and a divergence in the price occurs at the same time, these signs can be considered as a signal to enter the position.
Cross between moving averages with different time periods can also be used as a signal to enter a trade. For example, some traders consider the intersection of two 21-period and 50-period moving averages with each other as a signal to enter the position and proceed to enter. Of course, it should be noted that using these types of indicators as signals, despite their simplicity, which is one of their advantages, may cause a decrease in profit or even suffer loss due to the delay.
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Important points in setting and using indicators in trading
In setting the parameters and using technical analysis tools, the trader should pay attention to several points as follows:
- Whether the indicator is leading or lagging.
- The formula and how to calculate the indicator.
- The effective parameters in calculating the indicator and to know what changes occur in the issued signals by changing them.
- Indicator results in different timeframes is usually different. Therefore, the trader should identify the most suitable timeframe for using the indicator.
Advantages and disadvantages of using indicators in trading decisions
One of the most important advantages of these types of tools is their ease of use. But at the same time, it should be noted that these tools are only calculation formulas based on historical price data, so they may show completely opposite results in predicting price movements.
Experienced traders usually use combination methods in their trades to cover the weak points of the indicators. For example, they use the combination of several indicators along with a technical analysis style, such as price action or support and resistance levels.
Using popular indicators in different technical analysis methods
There are several indicators that are used by many traders in the forex market, but some of these tools are very popular because of their simplicity and also universality. Among the most popular, it can be mentioned RSI, moving averages, MACD, Stochastic, Fibonacci levels, Bollinger bands and pivot points.
