Using Various Technical Indicators Effectively for Optimal Benefits: Part I

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Technical indicators help traders in the Forex market to judge a trend’s strength and sustainability while price charts help Forex traders to identify tradable market trends. In the event an indicator suggests a reversal ensure as a trader you confirm the shift before acting. This can be achieved by using another indicator or by waiting for another trading period so that you can confirm the same indicator’s signal.

Many Forex traders use technical indicators to help them identify high probability trade exit and entry points. There is a myriad of technical indicators available in the Forex market today and therefore it is easy for traders to use many indicators inefficiently. In this article, we are going to expound on how to use various indicators, how to optimize indicators and how to avoid information overload so that you can be in a better position to most effectively take advantage of Forex Market. Some of the most commonly used indicators are:

 

Moving Averages

 

These are some of the most widely indicators in Forex trading. Moving averages indicators helps traders to ascertain existing trends, view overextended trends about to reverse as well as identify emerging trends.

There is simple moving average, exponential moving average and weighted moving average. Simple moving average weighs each and every price point over a given period of time equally. Price points are usually added together and averaged. On the other hand, a weighted moving average provides more emphasis to the latest data. These types of moving averages smoothens out a price curve while at the same time making the average more responsive to recent currency price changes. Exponential moving average are used to weigh more recent price data but in a different way from weighted moving average. It multiplies a % of the most recent price by the previous period’s average price.

 

Relative Strength Index (RSI)

 

RSI indicators are used to measure momentum of price movements on a scale of 0 to 100. It is worth noting that you should always confirm Relative Strength Index signals using other indicators. Divergences between RSI and prices may suggest a trend reversal.

 

Stochastics

 

Stochastic or oscillators help to monitor a trend’s sustainability as well as signal reversals in currency prices. There are two types; %D and %K measured on a scale ranging from 0 to 100. %D is slow and takes more time to turn while %K is fast and more sensitive.

 

Bollinger Bands

 

These are volatility curves used to identify lows in price or extreme highs. They establish bands around a currency’s moving average using a defined number of standard deviations around the moving average. It is worth mentioning that touching a low or high band does not mean an immediate trend reversal. These indicators adjust dynamically as volatility changes; this implies that touching the band simply means prices are extremely volatile. It is thus advisable that you use Bollinger Bands with other technical indicators to determine the trend’s strength.

 

Effective Use of Multiple Indicators

 

Technical analysts use technical indicators information to evaluate historical performance as well as predict future prices. The trader must interpret signals from technical indicators to determine trade entry or exit point that conforms to his own unique trading style. For optimal and effective use of technical indicators in the Forex market avoid multicollinearity at all costs. Multicollinearity refers to the multiple counting of same information. This happens when same types of indicators are used in one chart. Use of same types of indicators in one chart creates redundant signals that can be misleading. Instead of using the same types of technical indicators in one chart use complementary indicators. For instance, you can use Stochastic (momentum indicator) and ADX (Average Directional Index) which is a trend indicator in one chart. These two types of indicators provide different information about the market conditions and therefore used to confirm the other.