Forex Technical Indicators
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Forex Technical Indicators Indicators, when used correctly in trading forex can be used to determine the ideal moment for a trader to buy or sell. It is therefore important that every forex trader understand at least the basics of indicators before they start trading.
In this article, we’ll discuss five technical indicators new traders can start using now – even without a deep background in forex trading.
Simple moving average
A simple moving average is an indicator that that incorporates the average closing price of a currency pair over a specified number of time. A 12-day simple moving average means the average of daily closing price over a period of 12 days.
The purpose of a daily moving average is to identify the market trend. It does this because it identifies a signal in the past and provides a signal after a trend begins. A long term average moving above a long term average can signal an uptrend. A long term average moving below a short term average can signal a downtrend.
Relative strength index
A relative strength index (RSI) is an oscillator that measures the change of price movements. Relative strength index oscillates from 0 to 100. Forex traders consider 70 as overbought and 30 as oversold. Relative strength indexes are used to identify chart patterns that may not show in underlying charts like double tops and bottoms. RSI is also use to identify support and or resistance.
Stochastic indicators measure the momentum of price in a currency pair. The momentum of a currency pair changes before the actual movement happens to a currency pair. Stochastic indicators can be used by forex traders in many ways, but the main use is to identify overbought and oversold conditions in a currency pair. When a stochastic oscillator indicator is above 80, it is could signify an overbought condition while below 20 could signify an oversold condition. Stochastic indicators are easy to master but it takes a lot of practice for new forex traders to fully understand this concept.
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Traders use parabolic SAR indicators to determine optimal exit points for open positions. Each point represents a potential reversal. A point which appears below the indicator as an uptrend and above the indicator as a downtrend.
A parabolic stop and reverse indicator only works in trending markets as it gives a misleading signal in ranging sideways markets. It is a little challenging to learn but could be learnt by a new forex trader who puts in the effort.
Average True Range
The average true range is used to measure the volatility of price changes in a currency pair. The average true range calculation can be learnt for better understanding by a forex trader.
Expert Advisors (EAs)
An expert advisor (EA), sometimes referred to as a trading robot, is designed to automate all of your trading activities. An EA is not a physical robot like the ones used by manufacturers on a production floor, but is instead a computer program that lives inside your trading terminal. EAs can perform a range of tasks including generating trading signals based on your instructions, placing trades, and determining stop loss orders and take profit levels. An EA or trading robot can also close your trades once a stop loss order has been activated, or your profit target has been hit.
The MetaTrader 4 and MetaTrader 5 platforms allow traders to download community-created EAs, as well as to create your own. You can also customize the EAs that you download, so that they generate and execute trades based on your defined trading rules. EAs can be extremely useful for all levels of traders given that they monitor the global financial markets around the clock, which most human traders cannot do.
Once you have programmed your Expert Advisor with all your trading rules, you can rest assured that the EA will execute each and every trade in accordance with your instructions. Using an EA is a good way to eliminate the impact of your emotions, with the program executing trades according to your earlier instructions regardless of your recent losses or gains.
An important point to note is that for EAs to work you must have a terminal open and running. To get around this, traders can make use of the free VPS service from host their terminal remotely.
A custom indicator is a technical indicator that that helps a trader conduct market analysis in order to identify potential trading opportunities. The difference between an EA and a custom indicator is that the indicator does not perform any actual trading activities, such as entering and exiting trades. Instead, traders use custom indicators to identify trading signals, and then manually place the trades themselves. The MetaTrader 4 platform allows users to easily add their own custom indicators to the ones that are already part of the platform.
A custom indicator is very similar to the indicators that are already included as part of the MT4 and MT5 platforms, such as the RSI and the moving averages. Although most traders use custom indicators for technical analysis, you could go a step further and use custom indicators for fundamental analysis. You can program all the news events that you follow into the MT4 or MT5 platform and use the custom indicator to give you notifications of important market developments.
A script is a short program code that is created and set up in the same way as an EA or a custom indicator, but is programmed to perform a single action. A script is the most basic type of program created using the MT4 or MT5 programming languages, MQL4 and MQL5 respectively. The main difference between EAs and scripts is that the EA and custom indicators work continuously, while a script only works once.
You can use a script as a shortcut to performing some of the repetitive actions that you would perform manually in the terminal. A script can close all open trades in an account, or all open trades including a particular currency, or all pending orders involving a particular currency pair. Scripts can be extremely useful for regular traders with multiple trades open at any one time.