For all forex traders, there is a wide variety of different methods that can be used to judge the direction markets are moving in. For beginners, this means that foreign exchange trading can be confusing – there is just so much data to take in. Nonetheless, most opportunities for trading can be identified by looking at certain market indicators. By understanding how to utilise these essential indicators as part of a daily routine, even newcomers can end up trading like a professional in a short space of time.
The Long Term Trend
Although some traders are highly successful at identifying short term market adjustments between currencies, most beginners are more confident at identifying the long term trends and the different economic indicators that underpin them. Software that analyses trends, or so-called trend-following tools, can be of great use. At their simplest, they average out starting and closing positions of currencies each day, working out the moving average over the course of a week or a month, for example. In other cases, they can be set to much longer periods, such as a 200-day average, which really helps to understand the longer term outlook.
Trend Confirmation Tools
While understanding the long term trend between currencies is essential, it is important to also get to grips with how reliable that trend might be. Trend confirmation tools, which are powerful market indicators, can do this. Although they don't give specific advice for traders, like whether to buy or sell, they can help traders decide if they ought to be taking a long term position. Known as MACD, the moving average convergence divergence type of tool is among the most common. Remember that this tool should only really be paid attention to if it is in agreement with your long term trend analysis.
According to their inventor, Jon Bollinger, when prices reach their limits within a band, it does not mean traders will see an immediate reversal in the market trend. Rather, this indicator shows the usual upper and lower limits – or bands – of a currency's moving average. Used in conjunction with other indicators, Bollinger bands help traders to understand how reliable or volatile a trend may be.
These market indicators are used to alert traders to certain extreme conditions which are likely to see reversals in price. Often used in used in conjunction with other market indicators, they look at the proportion of traders who have long term positions in a currency compared with those who have short term positions. Sentiment indicators do not necessarily mean that immediate action needs to be taken as currencies can stay in extreme positions for some time, but they do indicate the strategy required when prices do start to change.
Market indicators that work out any over-purchased positions you may have taken up are an essential part of many traders' daily routines and worth including in your own. Since most traders opt into currencies on the long term trend, it can mean that they sometimes jump into over extended positions too quickly. Software that is designed to indicate overbought positions in effect tempers the natural human instinct of getting in on what is perceived to be a good thing. Many such tools work on a three day long relative strength indicator, or RSI, and identify when markets might pullback against the longer term trend.
Like tools that indicate overbought positions, oversold analysis is usually conducted by looking at the RSI over a three day period. However, the market indicator is not merely short term. Oversold tooling commonly also looks at the difference between the 50 day moving average compared to the 200 day one. If it and the three day RSI are below a certain level, then a trigger can be indicated which will help the trader to realise that he or she is oversold. Of course, the trigger level can be configured by the user, as preferred.
Profit Taking Analysis
This sort of market indicator is one that needs to be looked at on at least a daily basis and often more frequently than that. In short, profit taking tools provide the data that traders need to work out when to get out of a position and take profit. After all, traders are in the business of making money and while a position is maintained, virtual profit can – in theory – turn to loss. To identify the optimal time to “cash in”, profit taking tools indicate where a trader who is holding a long position ought to think about taking some profits. This recommendation is usually made if the RSI heads up to a relatively high level of more than 80.
Trading With Stochastics
Like RSI, stochastics are an oscillator type of market indicator that assist with the understanding of both overbought and oversold positions which are likely to make a reversal in price. Stochastics are displayed as two lines on a graph which indicate the relative positions over both overbought and oversold positions. It is where the two lines intersect that a solid buy signal is indicated.
Commitment Of Traders
Released on a weekly basis, the Commitment of Traders Report (COT) is a favourite of futures traders, but much-used by spot foreign exchange traders, too. Essentially, it provides data of positions and whether they are long or short term, so crossovers between the two can be used by traders to either get into, or out of, a position. However, the data is not displayed in real time.
Fibonacci retracement levels are market indicators which are based on a sequence of numbers discovered centuries ago. Because the Fibonnacci series is often found throughout nature, it can often be used to indicate what follows from pullbacks in the currency market, something that is ultimately down to human nature, after all. After a market movement occurs, prices often then retrace back to their original position in way that occurs according to Fibonacci retracement levels, allowing traders to predict which way it will move next.
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