Learn how to use the most popular technical indicators effectively

*This content is brought to you by CM Trading

By Fred Razak* 

Using market data such as the live price and trading volume as well as other technical indicators, traders can determine the current state of the market as well as its future direction. Technical indicators can help you find accurate entry signals if used correctly.

Technical analysis and utilizing technical indicators can be a very important tool in a trader’s market analysis regimen. Forex currency pairs typically experience dramatic price movements far larger than any other asset class and this is especially true during times of economic crisis.

As far as global crises are concerned, the Covid-19 pandemic takes the crown since the fallout has negatively affected most countries, major currencies and commodities.

Central banks across the world have started quantitative easing programs to boost the economy amid the lockdowns and this has created even more opportunities for traders who can simply enter the market by selling the currencies that are struggling to keep up, or alternatively invest in safe-haven assets such gold or the U.S dollar.

A good strategy to identify where you should enter the market and when to exit is to employ technical indicators that have been proven to be both effective as well as efficient in online forex trading.

Moving Averages

The moving average indicator provides an easy way to identify the market’s trend direction and therefore can help you decide whether you should buy or sell.

Moving averages are one of the most popular technical indicators and as the name suggests,  they simply calculate the average of an asset’s exchange rate for a set period of time. The results are then depicted with a line that connects the average of each period’s closing price on the chart.

In short, the moving average makes it easier to visualize the direction of the price. When live prices are higher than the moving average indicator then it’s likely that the market is experiencing an uptrend and this is a good buy signal for traders.

On the other hand, if the price remains below the indicator, then a downtrend is forming and you should potentially sell the asset in order to profit from the downward movement.

Bollinger Bands

This popular indicator helps traders by revealing an underlying market’s volatility and informing the about potential breakouts and reversals.

If a market is generally quiet, the price will likely remain more or less the same as it will trade within a tight range of a few pips. However, when a market is experiencing high volatility, the price will move up or down by several hundred pips according to supply and demand.

If you activate the Bollinger Bands indicator on your chart, you should see three lines; one on top of the price action, one in the middle and one below. When the market is volatile, the top and bottom lines of the indicator will move further apart or expand while when the price is moving sideways, the bands will come closer together or contract.

Bollinger Bands are especially useful since they act as dynamic support and resistance levels. If the price starts moving towards the top or bottom bollinger band, it tends to quickly move back to the middle in-between the bands. This phenomenon is known as a bollinger bounce.

Relative Strength Index (RSI)

The RSI is another widely popular indicator that measures the strength of the market and can also be utilized to confirm whether a downtrend or an uptrend is forming

This indicator’s results scale from 0 to 100 and – by default – when the number is above 70 then it’s an indication that the market is overbought and that the price will likely start to move downward. However, when the RSI is below 30 then the market is oversold and there is potential for a price increase.

On-Balance Volume (OBV)

This indicator takes the trading volume into consideration and also gauges buying and selling volume. As such it’s a very popular indicator in measuring the market momentum.

If an underlying asset is in high demand, traders will continue buying, driving prices higher and therefore the OBV indicator will also move up as well. If the OBV stops following the direction of the market i.e. the price is going up, but the OBV remains the same then it indicates that the trend is losing momentum and the price will start moving down.

A word of caution

There are hundreds of technical indicators that you can include in your trading strategy and apply to your charts, sometimes simultaneously, but if you want to achieve consistent results, it is highly advised that you keep the number of indicators you employ to a minimum.

Monitoring and trying to decipher the meaning of several indicators will lead to disappointment, especially considering the fact that forex is one of the fastest-moving financial asset classes.

The majority of professional traders utilize only a couple technical indicators to generate their entry and exit signals while using at least one more to confirm their bias.

If you have any questions regarding which indicators better align with your trading strategy and how you can use them more effectively, you can always get in touch with your personal trading specialist.

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  • Fred Razak is a senior trading expert at CM Trading.