Part 23 Technical Analysis – Basic indicators (MA+BB)

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Contents

5 Essential Indicators Used in Technical Analysis

Contents

Introduction

Traders use technical indicators to gain additional insight into the price action of an asset. These indicators make it easier to identify patterns and spot buy or sell signals in the current market environment. There are many different types of indicators, and they are widely used by day traders, swing traders, and sometimes even longer-term investors. Some professional analysts and advanced traders even create their own indicators. In this article, we’ll provide a brief description of some of the most popular technical analysis indicators that can be useful in any trader’s market analysis toolkit.

1. Relative Strength Index (RSI)

The RSI is a momentum indicator that shows whether an asset is overbought or oversold. It does this by measuring the magnitude of recent price changes (the standard setting is the previous 14 periods – so 14 days, 14 hours, etc.). The data is then displayed as an oscillator that can have a value between 0 and 100.

Since the RSI is a momentum indicator, it shows the rate (momentum) at which the price is changing. This means that if momentum is increasing while the price is rising, the uptrend is strong, and more and more buyers are stepping in. In contrast, if momentum is decreasing while the price is rising, it may show that sellers soon might take control over the market.

A traditional interpretation of the RSI is that when it’s over 70, the asset is overbought, and when it’s under 30, it is oversold. As such, extreme values may indicate an impending trend reversal or pullback. Even so, it might be best not to think about these values as direct buy or sell signals. As with many other technical analysis (TA) techniques, the RSI may provide false or misleading signals, so it’s always useful to consider other factors before entering a trade.

Eager to learn more? Check out our article on the Relative Strength Index (RSI).

2. Moving Average (MA)

A moving average smooths out price action by filtering out market noise and highlighting the direction of the trend. As it’s based on past price data, it’s a lagging indicator.

The two most commonly used moving averages are the simple moving average (SMA or MA), and the exponential moving average (EMA). The SMA is plotted by taking price data from the defined period and producing an average. For example, the 10-day SMA is plotted by calculating the average price over the last 10 days. The EMA, on the other hand, is calculated in a way that gives more weight to recent price data. This makes it more reactive to recent price action.

As mentioned, the moving average is a lagging indicator. The longer the period, the greater the lag. As such, the 200-day SMA will react slower to recent price action than the 50-day SMA.

Traders often use the relationship of the price to specific moving averages to gauge the current market trend. For example, if the price stays above the 200-day SMA for a prolonged period, the asset may be considered to be in a bull market by many traders.

Traders may also use moving average crossovers as buy or sell signals. For example, if the 100-day SMA crosses below the 200-day SMA, it may be considered a sell signal. But what exactly does this cross mean? It indicates that the average price over the last 100 days is now below that of the last 200 days. The idea behind selling here is that short-term price movements are no longer following the uptrend, so the trend may be reversing.

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Eager to learn more? Check out our article on Moving Averages.

3. Moving Average Convergence Divergence (MACD)

The MACD is used to determine the momentum of an asset by showing the relationship between two moving averages. It’s made up of two lines – the MACD line and the signal line. The MACD line is calculated by subtracting the 26 EMA from the 12 EMA. This is then plotted over the MACD line’s 9 EMA – the signal line. Many charting tools also often incorporate a histogram, which shows the distance between the MACD line and the signal line.

By looking for divergences between the MACD and the price action, traders might gain insight into the strength of the current trend. For example, if the price is making a higher high, while the MACD is making a lower high, the market may be reversing soon. What is the MACD telling us in this case? That price is increasing while momentum is decreasing, so there is a higher probability of a pullback or reversal occuring.

Traders may also use this indicator to look for crossovers between the MACD line and its signal line. For example, if the MACD line crosses above the signal line, that may suggest a buy signal. Conversely, if the MACD line crosses below the signal line, that may indicate a sell signal.

The MACD is often used in combination with the RSI, as they both measure momentum, but by different factors. The assumption is that together they may give a more complete technical outlook on the market.

Eager to learn more? Check out our article on the MACD.

4. Stochastic RSI (StochRSI)

The Stochastic RSI is a momentum oscillator used to determine whether an asset is overbought or oversold. As the name suggests, it’s a derivative of the RSI, as it’s generated from RSI values instead of price data. It’s created by applying a formula called the Stochastic oscillator formula to the ordinary RSI values. Typically, the Stochastic RSI values range between 0 and 1 (or 0 and 100).

Due to its greater speed and sensitivity, the StochRSI can generate a lot of trading signals that can be tricky to interpret. Generally, it tends to be the most useful when near the upper or lower extremes of its range.

A StochRSI reading above 0.8 is usually considered overbought, while a value below 0.2 may be considered oversold. A value of 0 means that the RSI is at its lowest value in the measured period (the default setting is typically 14). Conversely, a value of 1 represents that the RSI is at its highest value in the measured period.

Similarly to how the RSI should be used, an overbought or oversold StochRSI value doesn’t mean that the price will surely reverse. In the case of the StochRSI, it simply indicates that the RSI values (which StochRSI values are derived from) are near the extremes of their recent readings. It’s also important to keep in mind that the StochRSI is more sensitive than the RSI indicator, so it tends to generate more false or misleading signals.

Eager to learn more? Check out our article on the Stochastic RSI.

5. Bollinger Bands (BB)

Bollinger Bands measure the volatility of the market, as well as overbought and oversold conditions. They are made up of three lines – an SMA (the middle band), and an upper and lower band. The settings may vary, but typically the upper and lower bands are two standard deviations away from the middle band. As volatility increases and decreases, the distance between the bands increases and decreases as well.

Generally, the closer the price is to the upper band, the closer to overbought conditions the charted asset may be. Conversely, the closer the price is to the lower band, the closer to oversold conditions it may be. For the most part, price will stay within the bands, but on rare occasions, it may break above or below them. While this event may not be a trading signal in itself, it can act as an indication of extreme market conditions.

Another important concept of BBs is called the squeeze. It refers to a period of low volatility, where all bands come very close to each other. This may be used as an indication of potential future volatility. Conversely, if the bands are very far from each other, a period of decreased volatility may follow.

Eager to learn more? Check out our article on Bollinger Bands.

Closing thoughts

Even though indicators show data, it’s important to consider that the interpretation of that data is very much subjective. As such, it’s always useful to step back and consider if personal biases are affecting your decision-making. What may be a direct buy or sell signal for one trader might just be market noise for another.

As with most market analysis techniques, indicators are at their best when used in combination with each other, or with other methods, such as fundamental analysis (FA).

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Technical Indicators Defined and Explained

Technical indicators are chart analysis tools that can help traders better understand and act on price movement. There is a huge range of technical analysis tools available that analyze trends, provide price averages, measure volatility and more.

In this piece, we explore the types of technical indicators available, from RSI to Bollinger Bands®, explain how to respond to technical signals, and reveal the top tips to making the tools an effective part of your trading journey.

Types of Technical Indicators

There are four main types of technical indicators: Trend Following, Oscillators, Volatility and Support/Resistance. They are grouped based on their function, which ranges from revealing the average price of a currency pair over time, to providing a clearer picture of support and resistance levels.

List of Technical Indicators

1. Trend Indicators

Trend following indicators were created to help traders trade currency pairs that are trending up or trending down. We have all heard the phrase ‘the trend is your friend’ – these indicators can help point out the direction of the trend and can tell us if a trend actually exists.

Moving Average Indicator

A Moving Average (MA) is a technical tool that averages a currency pair’s price over a period of time. The smoothing effect this has on the chart helps give a clearer indication on what direction the pair is moving – either up, down, or sideways. There are a variety of moving averages to choose from, with Simple Moving Averages and Exponential Moving Averages being the most popular.

Ichimoku is a complicated looking trend assistant that is simpler than it appears. This Japanese indicator was created to be a standalone indicator that shows current trends, displays support/resistance levels, and indicates when a trend has likely reversed. For more, check out our Definitive Guide to Trading Trends with Ichimoku Cloud .

The Average Direction Index won’t tell you whether price is trending up or down, but it will tell you if price is trending or is ranging. This makes it the perfect filter for either a range or trend strategy by making sure you are trading based on current market conditions. For more, see our article How to Use ADX to Identify Forex Trends .

2. Oscillator Indicators

Oscillators give traders an idea of how momentum is developing on a specific currency pair. When price treks higher, oscillators will move higher. When price drops lower, oscillators will move lower. Whenever oscillators reach an extreme level, it might be time to look for price to turn back around to the mean.

However, just because an oscillator reaches ‘Overbought’ or ‘Oversold’ levels doesn’t mean we should try to call a top or a bottom. Oscillators can stay at extreme levels for a long time, so we need to wait for a valid sign before trading.

The Relative Strength Index is arguably the most popular oscillator to use. A big component of its formula is the ratio between the average gain and average loss over the last 14 periods. The RSI is bound between 0 – 100 and is considered overbought above 70 and oversold when below 30. Traders generally look to sell when 70 is crossed from above and look to buy when 30 is crossed from below. Click here to learn about A Better Way to Use RSI to Signal When to Take a Forex Trade.

Stochastics offer traders a different approach to calculate price oscillations by tracking how far the current price is from the lowest low of the last X number of periods. This distance is then divided by the difference between the high and low price during the same number of periods. The line created, %K, is then used to create a moving average, %D, that is placed directly on top of the %K. For more, check out our article How to Trade With Stochastic Oscillator .

The Commodity Channel Index is different than many oscillators in that there is no limit to how high or how low it can go. It uses 0 as a centerline with overbought and oversold levels starting at +100 and -100. Traders look to sell breaks below +100 and buy breaks above -100. To see some real examples of the CCI in action, take a look at how to Trade Forex with the CCI Indicator .

The Moving Average Convergence/Divergence tracks the difference between two EMA lines, the 12 EMA and 26 EMA. The difference between the two EMAs is then drawn on a sub-chart (called the MACD line) with a 9 EMA drawn directly on top of it (called the Signal line). Traders then look to buy when the MACD line crosses above the signal line and look to sell when the MACD line crosses below the signal line as seen here. There are also opportunities to trade divergence between the MACD and price.

3. Volatility Indicators

Volatility measures how large the upswings and downswings are for a particular currency pair. When a currency’s price fluctuates wildly up and down it is said to have high volatility. Whereas a currency pair that does not fluctuate as much is said to have low volatility. It’s important to note how volatile a currency pair is before opening a trade, so we can take that into consideration with picking our trade size and stop and limit levels. Read our article on the Top 10 Most Volatile Currency Pairs for more.

Bollinger Bands® Indicator

Bollinger Bands ® print three lines directly on top of the price chart. The middle ‘band’ is a 20-period simple moving average with an upper and low ‘band’ that are drawn two standard deviations above and below the 20 MA. This means the more volatile the pair is, the wider the outer bands will become, giving the Bollinger Bands® the ability to be used universally across currency pairs no matter how they behave.

Bollinger Bands® is a registered trademark of John Bollinger.

The Average True Range tells us the average distance between the high and low price over the last set number of bars (typically 14). This indicator is presented in pips where the higher the ATR gets, the more volatile the pair, and vice versa. This makes it a perfect tool to measure volatility. For more, see How to Use ATR in a Forex Strategy .

4. Support/Resistance Indicators

Support and resistance is key to technical analysis. The concept refers to the price levels on charts that form barriers to an asset price being pushed in a given direction. For more, see our article on Identifying Support and Resistance and make sure you consider the indicators below.

Pivot Points are one of the most widely used in all markets including equities, commodities, and Forex. They are created using a formula composed of high, low and close prices for the previous period. Traders use these lines as potential support and resistance levels, levels that price might have a difficult time breaking through.

Price channels or Donchian Channels are lines above and below recent price action that show the high and low prices over an extended period of time. These lines can then act as support or resistance if price comes into contact with them again. For a deeper look at using this tool successfully, read Breakout Trades and the Power of Price Channels .

ForeX Technical Analysis & Analytics

Технический Анализ и Аналитика рынка Форекс

Category Archives: FOREX TECHNICAL ANALYSIS

Professional forex technical analysis and trade recommendation

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Since the beginning of the new 2020, the US dollar index (USDX) cannot determine the further direction of trade. As a result, we got an interesting technical picture.

From this point, the US dollar can both continue to grow in the long-term channel and begin a downward trend. Continue reading →

MACD divergence indicator for MT4

In the article “MACD – non-standard use on Forex”” I already described the technical indicator FX5 MACD DIVERGENCE, which determines the divergence of the MACD indicator.

In this article, I present to your attention another technical indicator for the MT4 trading terminal, revealing the divergence of the MACD indicator. Continue reading →

Gold (XAUUSD) – consolidation at the market

The uptrend in the gold market has changed to a downtrend relative to the US dollar.

Gold (XAUUSD) came out of the growing channel and formed a downward channel. Recent impulses of the price formed a new Lower Low, and Lower High. However, the last week the movement in the gold market has stopped. What’s next? Continue reading →

Breakeven level information indicator for MT4.

Some forex trading strategies include splitting one position into several smaller ones, adding to already open positions or averaging.

When opening several positions, it is not very convenient to manually calculate the breakeven level for all open positions in the MT4 terminal.

This task is greatly facilitated by a simple breakeven indicator. Continue reading →

Strong consolidation in the forex market – dollar VS euro.

After a series of central bank meetings, the foreign exchange market entered a phase of strong consolidation.

This consolidation is clearly visible by the damping fluctuations in the US dollar index – USDX. Continue reading →

Defining Forex Supply / Demand Zones (continued)

In this article, we continue to study the trading methodology from the demand/supply zones of Sam Seyden and his followers. You can familiarize yourself with the first article at the link – “Forex Trading from Supply and Demand Zones“.

The trading strategy in supply / demand zones is quite simple and methodologically fundamentally not particularly different from trading at support / resistance levels. Continue reading →

Bear trap on the EURCHF currency pair

The EURCHF currency pair has been in a downtrend for 4 months.

For the last 20 days, we have seen consolidation on the pair, which is highlighted in the chart by a blue rectangle. Over the past three days, we have seen an unsuccessful attempt to break through the lower edge of the consolidation range, which led to the formation of a bear trap on the EURCHF. Continue reading →

Japanese Yen – Forex Technical Analysis August 18, 2020

The Japanese yen has recently been in strong demand as a “safe haven” for investors on the topic of the risk off sentiments associated with the trade war between the US and China.

On the daily chart of the USDJPY currency pair, we see a clear downward long-term channel. Continue reading →

The key to understanding the current situation in the Forex

Take a look at the 4-hour dollar index (USDX) futures chart. We see very strong consolidation in a narrow range (blue rectangle).

Traders are in a state of uncertainty about the future prospects of the US dollar. Continue reading →

Forex trading from supply and demand zones

Trading in financial markets from levels (or zones) of supply and demand is traditionally associated with the methodology developed by Sam Seiden and his colleagues.

This methodology is extremely interesting for traders for several reasons. First of all, it is quite simple to understand and based on the basic principles of market interaction of supply and demand. It does not use complex technical indicators and, according to many traders, it provides significant advantages in the real trading of any financial instruments. Let’s delve into this methodology together. Continue reading →

British Pound (GBPUSD) – high volatility ahead

Technical analysis of the GBPUSD currency pair tells us about the current extreme degree of consolidation in this pair.

As a rule, there is a way out of any consolidation and it can be very volatile, which provides traders with good trading opportunities. Continue reading →

US dollar – change of the long-term trend? Do not hurry…

The week before last week was marked by the most significant weekly decline in the US dollar index (USDX) for the entire last period of its growth. And this is more than one year.

During the entire last year, investors and speculators bought the US dollar at all its falls and were in profit. Continue reading →

EURUSD – traders looking for direction

In the previous article I noted the formation of a technical triangle on the euro-dollar currency pair (on the chart it is a red triangle). The breakdown of the lower edge of this triangle led to the removal of euro buyers’ stops and the impulse movement down almost by one figure.

However, this breakdown turned out to be false and euro buyers were able to return the pair inside the triangle and return to the balance of supply and demand. Continue reading →

Euro-dollar volatility at minimum values

The daily volatility of the euro-dollar currency pair (EURUSD) on the foreign exchange market has reached its lowest levels in the last five years.

Such a low value of the daily indicator ATR (14) was last observed in June 2020. Continue reading →

Technical picture on the EURUSD currency pair in anticipation of the FOMC

The euro-dollar currency pair is in consolidation for 5 months. The consolidation range is highlighted on the daily chart with a blue rectangle and limited to the range of values ​​1.12145-1.15000.

But any ranges at some point end. It’s time for traders to make a decision. Continue reading →

Euro-dollar currency pair (EURUSD) is consolidating in triangle

Yesterday we wrote on our website about the triangle formed on the US dollar index – Geometric metamorphosis of the US dollar index (USDX).

On the EURUSD currency pair, the figure of technical triangle has also formed. Continue reading →

Geometric metamorphosis of the US dollar index (USDX)

The upward trend of the US dollar in recent days has slowed down in its development. Is it just a pause in the foreign exchange market or signs of an approaching reversal?

Over the past few days, the US dollar (USDX) has been consolidating around the level formed by the previous high on the value of 96.836. Continue reading →

Euro-dollar on forex – triangle technical figure

The agreement between US and China at the last G20 summit led to a decrease in tensions in financial markets. The risk appetite led to demand, including for the single European currency. However, the long-term trend of the US dollar growth on forex is still in force.

What technical levels do traders of the EURUSD pair need to monitor in the foreign exchange market? Continue reading →

Brexit deal under attack – what awaits us next?

The last two trading days were marked by events on the front of the British exit process from the European Union. The Brexit deal is prepared and agreed by the parties. What awaits us next?

The UK is due to leave the European Union at 23:00 GMT on Friday 29 March, 2020, after people voted by 51.9% to 48.1% for Leave in the 2020 referendum. Continue reading →

EURUSD technical analysis – a delicate balance in the market

The last five months, the EURUSD currency pair has been trading in a fairly wide range on the forex market.

On the pair chart, this range is highlighted with a blue rectangle and is limited to 1.13000 -1.18500. Continue reading →

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