A technical indicator is a chart analysis tool that helps a trader to understand price movements and take action. Many technical analysis tools measure volatility, analyze trends, give price averages, and more. In this article, we look at some of the technical indicators and how they relate to your trading journey.
Types of Technical Indicators
Oscillators give a trader a gist of how a specific currency’s momentum is developing. When prices dip, oscillators dip as well. When oscillators go to extremes, it means it is time for the trader to check for the price and turn back to the mean.
However, it does not mean that we should attempt to call a top or bottom when an oscillator reaches oversold or overbought levels. Oscillators can stick at an extreme level for a long period, so you need to wait for a sign before you trade.
· RSI Indicator
The RSI or Relative Strength Index is probably the most popular and common oscillator. A significant part of its formula is equal to the ratio between the average gain and loss over the previous 14 periods. The RSI is typically tied between 0-100 and when it reaches 70 is termed as oversold, and overbought when it is under 40. Traders sell when it surpasses 70 from above, and sell when it surpasses 30 from below.
· Stochastics Indicator
Stochastics give traders a different method of calculating price oscillations by tracking the distance the current price lies from the lowest of the last number of periods. The distance is divided by the difference between the low and high prices during similar periods. The line that is created- %K, is used for creating a moving average-%D, which is placed directly above the %K.
· CCI Indicator
The Commodity Channel Index (CCI) is set apart from other oscillators in that it is not limited as to how low or high it can get. 0 is the CCI’s centerline and the overbought and oversold start at +100 and -100. Traders sell breaks under +100 and buy above -100.
· MACD Indicator
The MACD or Moving Average Convergence/Divergence monitors the difference in the 12 EMA and 26 EMA. Their difference is drawn on a sub-chart or the MACD line, and a 9 EMA is drawn above it (Signal Line).
Traders strive to buy when the MACD line is above the 9 EMA or Signal line and sell when the MACD line dips below the 9 EMA.
2. Volatility Indicators
Volatility measures the size of up and downswings for particular currency pairs. When the price of a currency fluctuates fast up and down, it has high volatility. A currency pair that is more stable and does not fluctuate a lot has low volatility. Before you open a trade, check the currency pair’s volatility before you pick your stop and limit levels and trade size.
· Bollinger Bands®
The Bollinger Bands® print three lines above the price chart. The middle band represents a 20-period SMA with upper and lower bands, which are drawn two deviations above and below the 20-period SMA. This implies that the more volatile the currency pair, the wider the outer bands, which allows the Bollinger Bands® to be used across all currency pairs.
· ATR Indicator
The ATR or Average True Range gives us the mean distance between high and low prices in the last set bar numbers, mostly 14. Represented by pips, the higher the ATR, the more volatile the currency pair, with the reverse also true.
These are just some of the indicators used in trade, but can help you to become better in technical analysis. The indicators also allow you to grasp the concept of price action. You only need to choose an indicator that works for you, after some research. Other indicators include support and resistance, which includes pivot points, Donchian Channels, Trend indicators, etc.
Complicating your trade by using too many indicators can force you to go through an information overload. Keep the process simple, and only use a few indicators, following your trading plan goals. Understand your strengths and weaknesses, as well as the indicator’s pros and cons, and make an informed decision. As a beginner, asking for help from more experienced traders will work well in your stead.