May 27 2021 0
Forex indicators for technical analysis are indispensable tools of traders when participating in the fx market. Indicators are data points that forecast the direction of the future movement of a product. The right combination of indicators can help build an optimal and profitable trading strategy for investors. Join us to learn about the 5 most effective and most commonly used indicators for technical analysis.
Bollinger Bands are a combination of moving averages and standard deviations. The structure of this indicator consists of a moving average in the middle and two upper and lower bands with a 2% volatility compared to the middle line, allowing traders to compare the volatility and relative price of an asset. currency for a certain period of time.
Bollinger Bands has a lot of useful features and one of its unique features is the phenomenon of “bottlenecks”. This phenomenon occurs when the two borders narrow, warning that the market is about to have strong volatility. In addition, we can also identify an oversold market when the price is near the lower border and conversely, the market is overbought when the price is near the upper border.
The high volatility of the market helps Bollinger Bands promote their strengths very well. Depending on the volatility, we will have different trading strategies.
The moving average is one of the most favorite indicators of many investors. There are 2 main types of moving averages: the simple moving average (SMA) and the exponential moving average (EMA).
A simple moving average is the average price of a coin over a certain period of time. For example, the 20 SMA on the daily chart frame would be a line on the chart representing the average price of a cryptocurrency over the previous 20 days.
The exponential moving average is similar to the simple moving average, however, it focuses on the most recent price parameters rather than the past, thus more accurately reflecting what is happening now. , and filter out more noise. The EMA shows the most recent price movements, so the EMA is quite sensitive to short-term fluctuations, the signals will happen faster than the SMA, helping traders quickly recognize the reversal signals from there. more responsive to short-term price movements.
Moving averages are useful for all traders, whether you are a day trader, swing trader or a long-term investor. They can act as support or resistance and allow you to quickly identify a currency's trend.
Like other technical analysis tools, Fibonacci is used to identify certain trading patterns. Specifically, it is used to identify peaks and troughs, and support and resistance levels to reveal potential price movements. Fibonacci is a sequence of numbers where each number is the sum of two previous numbers. The basic Fibonacci sequence is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144...
When analyzing charts, technical analysts will identify two extremes, i.e. maximum and minimum prices, and divide the distance between them by the Fibonacci ratios: 23.6%, 38.2% , 50%, 61.8% and 100%. This technique is based on the assumption that the boundary of each segment represents a potential turning point in which the pattern from the previous segment will be replicated.
RSI (Relative Strength Index)
The Relative Strength Index (RSI) is a momentum indicator that uses oscillators to determine whether an asset is currently overbought or oversold. An asset that is currently overbought is likely to turn bearish in the near future. Conversely, when an oversold crypto asset is most likely to turn bullish. The RSI is calculated on a scale of 1 to 100, usually, above 70 is a sign that an asset is overbought, below 30 is an oversold level.
To calculate the RSI, analysts will use price history, which calculates relative strength based on closing prices for a given period of time. The advantage of the RSI is that it can relatively accurately forecast market turning points. However, scores between 30 and 70 will not provide any important data of price action.
Support and resistance
In technical analysis, the lines connecting important price peaks and troughs are called support and resistance lines. Traders use these lines to determine market entry points.
Support level – the level where buying pressure prevails over selling pressure. This level can be considered suitable for opening a buy position. Most traders prefer to act as buyers, when price approaches support.
Resistance level – the level where selling pressure prevails over buying pressure. Traders will open a short position when the price approaches the resistance level.
Identify trends based on support and resistance:
- With an uptrend, the support line has a positive slope.
- With a stable price trend, the support line is horizontal.
- With a downtrend, the resistance line has a negative slope.
- With a stable price trend, the resistance line is horizontal.
When an uptrend turns into a downtrend, resistance becomes support. And vice versa, support becomes resistance when a downtrend turns into an uptrend.
Above are some of the most commonly used forex indicators for technical analysis by traders. Through this article, I hope you can choose the most suitable and effective tool for your trading strategy. Good luck!