Technical charting indicators are present and common in technical analysis. Technical indicators are simply mathematical and graphical representations of currency pair price actions. There are different types of technical indicators in Forex, the main ones being: Bollinger bands, the moving average convergence/divergence (MACD), the parabolic stop and reversal (Parabolic SAR), the stochastic oscillator and the relative strength index (RSI).
Bollinger bands are used in technical analysis to provide a relative definition of high and low. The bands were invented and named after John Bollinger in the 1980s, Bollinger being a Forex trader himself. The bands allow traders and investors to measure both the highness and lowness of a particular currency pair’s price in relation to previous trades. There are two Bollinger bands: the upper band and the lower band. The upper band represents a particular currency pair’s price when it is high and the lower band represents the same currency pair’s price when it is low.
Bollinger bands are based on rolling averages of currency pairs. When using Bollinger bands, you will notice that there are three lines running alongside each other: the middle line will represent the daily average price and the other two will remain parallel to the daily average price on either side – these other two lines will run at +0.1% and -0.1% of the daily average price line (the middle line). The two lines running parallel, the upper band and the lower band lines, will allow traders and investors to notice where a particular currency pair’s price is relative to its average price. For Bollinger bands to be effective, traders and investors must attempt to adjust the outside band lines so that they accurately depict the currency pair price’s highs and lows. This will then, in turn, allow traders and investors to buy at the lows and sell at the highs.
Bollinger bands are particularly effective if used correctly. It may take some practice, but traders and investors can significantly improve their results and deduce much more profit with this lucrative technical charting and trading tool. Remember, that the two band lines can be adjusted to reflect a currency pair’s price movements in different environments. This is important, as it is vital that Bollinger bands present the most accuracy possible in order to be as effective as possible. You should also remember that the size of the Bollinger band is affected greatly by daily volatility – it is the Bollinger band’s most important variable.
The moving average convergence/divergence (MACD) is another indicator used in technical analysis that helps traders and investors to spot beginning and growing trends. In order to take full advantage of a trend, you need to enter it in the beginning stages, so that you can reap the rewards.
The MACD is composed of two lines and a bar chart. One line is erratic and unpredictable and the other line is much smoother and even. There is also a bar chart that accompanies the two lines. Generally, the MACD is set at 12-26-9. What this means, is that the more unpredictable line is set as a rolling average of the past 12 days. This also means that the more even line is set as a rolling average of the past 26 days. Finally, again if the MACD is set at 12-26-9, this will mean that the bar chart will represent the difference between the two lines as a 9-day rolling average. The bar chart will sit at the bottom and it will help to predict beginning and growing trends, allowing traders and investors to take more advantage of these new trends and potentially make more profit.
Although the MACD can be very effective and is very popular, the chart is also very basic and one drawback is that the chart can also present errors and inaccuracy. The MACD is particularly effective in estimating and determining the magnitude of a new trend rather than its direction.
The parabolic stop and reversal (Parabolic SAR) is an important tool used frequently by traders and investors conducting technical analysis. It is one of the more simple and easier-to-use technical tools in Forex trading. There are two candles that are graphed: these are the buy and sell candles. There is also a dotted line that runs alongside the candles which symbolizes the many reversals possible in a currency pair’s price movement. Quite simply, if the dotted line is shown above the candles, the Parabolic SAR is signalling that you should potentially sell – and vice versa, if the dotted line is shown below the candles, the Parabolic SAR is signalling that you should potentially buy.
Stochastics were developed a while ago in the 1950s by George Lane. Stochastics are technical indicators that try to measure when a particular currency has been overbought or oversold. When the Stochastics signal that a particular currency has been overbought, the trader or investor might want to sell – and vice versa, when the Stochastics signal that a particular currency has been oversold, the trader or investor might want to buy.
The Stochastics chart, based on a 100-point scale, is in fact quite complex and mathematical. However you don’t have to understand its model completely in order to use it. Quite simply, if the chart reads over 80, the chart is signalling that the particular currency has been overbought (meaning that the trader or investor might want to sell at this point). If the chart reads under 20, the chart is signalling that the particular currency has been oversold (meaning that the trader or investor might want to buy at this point). Different trades and investments will use and perhaps require the use of different benchmarks (for e.g. instead of 80-20, a benchmark of 70-30 may be used).
The relative strength index (RSI) works very similarly to Stochastics. Like Stochastics, the RSI is based on a 100-point scale. The RSI also, like the Stochastics chart, tries to measure whether a particular currency has been overbought or oversold by the Forex market. In function, the RSI is very similar to the Stochastics chart, however the relative strength index differs somewhat as it is based on slightly different variables.
In conclusion, there is a variety of different technical charting indicators used in Forex technical analysis. The main ones being: Bollinger bands, the moving average convergence/divergence (MACD), the parabolic stop and reversal (Parabolic SAR), the stochastic oscillator and the relative strength index (RSI). Once you have a basic understanding of the main technical indicators used in Forex, it is recommended that you learn more about each one in more detail, so that you know how to use each one effectively and to your advantage.