You should understand technical indicators’ roles if you want to minimize Forex trading losses while propelling your profit margins.
Consequently, you should find out why technical analysis is critical to your trading, examples of technical indicators to kickstart your trading, advantages, and limitations of the mentioned indicators.
You should be in a position to boost your forex earnings after reading and applying what this article is about to teach you. Ready for more? Let us take a deep dive below.
1. Understand Why Technical Analysis Is Vital to Forex Trading
(Forex) technical analysis is a methodology to predict the price and volume traded of currency pair by studying historical data. It answers the question of ‘when’ prices are likely to fall or rise. This gives rise to two questions:
First, is technical analysis a necessity in forex trading? Secondly, is it advisable to rely entirely on technical analysis to make forex decisions? Here are the answers to these commonly asked forex questions.
Yes, technical analysis is one of the necessities in forex trading. It plays an enormous role in shaping your buying and selling decisions.
Although you should dedicate the third eye to technical analysis, it may be inadequate to rely entirely on decision-making. Other analyses to balance the forex trading decision equation are fundamental and sentiment.
While technical analysis answers the “when” part of the equation, fundamental analysis enables you to determine why currency pair prices and volume change under the influence of economic, political, and social factors. This means grabbing a little accounting and finance concepts is crucial to you as a trader.
Sentiment analysis entails tracking the opinions of other investors on a particular currency pair. For instance, negative sentiments affected GBP/USD in 2016 by making GBP slump after Brexit news.
Now that you’ve understood why you should balance technical analysis with fundamental and sentiment analysis, let us look at the most typical ways to conduct technical analysis.
2. Find Out the Role of Technical Indicators
Simply put, technical indicators are tools to ease your technical analysis. The most typical technical indicators are:
- Stochastic oscillator.
- Moving average convergence divergence (MACD).
- Bollinger bands.
- Relative strength index (RSI).
- Fibonacci retracement.
- On balance volume (OBV).
- Ichimoku Kinko Hyo.
- Chaikin money flow.
- Klinger oscillator.
- Average directional index (ADX).
The above technical indicators are broadly grouped into the trend, volume, volatility, and momentum indicators. Here are the explanations and advantages of the technical indicators:
3. Know the Advantages of The Most Typical Technical Indicators
Examples are MACD, Bollinger bands, RSI, and Average Directional Index. They focus on past information, using the data to draw curves.
The resulting lines or histogram enables you to determine when to buy or sell a currency pair.
Momentum indicators such as MACD, RSI, and ADX help you realize the price change rate. Most of them, such as RSI and ADX, possess scales calibrated between 0 and 100.
Readings below 30 for RSI and 20 for ADX show overselling, while those above 70 and 50, respectively, show overbuying.
Examples of volume indicators are OBV, Chaikin money flow, and Klinger oscillator. They help you find details of the number of currency sellers and buyers. By so doing, they combine the strengths of trend and momentum indicators.
Volatility indicators such as Bollinger bands express the quantity of currency price moving in a direction. They help you realize profitable trading opportunities.
After knowing why and when you need technical indicators, you should (psychologically) prepare for technical indicators’ weaknesses.
4. Technical Indicators Have Limitations!
The main weakness of technical indicators is that you should not use them in isolation if you don’t want to get mixed market signals. Here’s an example to explain this point:
Stochastic oscillators will help you determine overselling and overbuying until a market starts trending. Then, it gives false market signals.
What Is the Way Forward?
After understanding the definition, applications, advantages, and limitations of technical indicators, you should combine several of them to enable you to make the best forex trading decisions.
The more exciting part is that most trading platforms have charts with various technical indicators set to kickstart your forex trading.