The most popular chart indicators in forex are: bollinger bands, MACD, stochastic indicator, RSI, Ichimoku Kinko Hyo and Parabolic SAR. To increase your chances of making forex, you should use at least two of these common indicators. In this lesson we will provide a summary of each indicator with examples.
Bollinger Bands
Bollinger bands are technical tools used to measure the level of volatility in the market and they can act as support and resistance level.
There are two ways of trading using Bollinger bands: trading at Bollinger bounce and Bollinger squeeze.
Bollinger Bounce
This method is used when the forex market is ranging – when there is no specific trend – or a horizontal trend.
As shown in the figure above, you should buy when the prices hit and bounce off the lower band. Sell when the price bounces off the upper band.
In this case, the upper band becomes a temporary resistance while the lower band becomes a temporary support.
Bollinger Squeeze
The Bollinger squeeze is used when the market is breaking out.
As shown in the figure above, the Bollinger bands “squeeze” when the market is very quiet. During this time, trade volumes are low and breakout is close.
When the prices break out of the upper band, you should buy. You should sell when the prices close outside the lower band.
MACD
The Moving Average Convergence Divergence (MACD) is a technical tool of analysis used to identify trends and trend reversals.
This chart indicator has two moving averages – slow and fast moving averages – as well as a histogram that measures the distance between the two moving averages.
As shown in the figure above, buy or sell signals occur at a crossover – where the fast line crosses over the slow line. The cross over indicates a trend reversal.
Parabolic SAR
The Parabolic Stop and Reversal (SAR) provides signals for bullish and bearish situations.
A sell signal occurs when the dots fall above the candlesticks and a buy signal occurs when the dots fall below the candles.
Stochastic Indicator
The stochastic indicator shows oversold and overbought conditions in the forex market.
The market is oversold if the moving average lines fall above 80, indicating an imminent downtrend – a sell signal.
A buy signal occurs when the market is oversold – when the moving average lines are below 20.
Relative Strength Indicator
Like the stochastic oscillator, the relative strength indicator (RSI) indicates oversold and overbought conditions in the forex market.
When the RSI is above 70, the market condition is overbought, and the trader should look for a sell opportunity.
When the RSI falls below 30, the trader should look for a buy opportunity because it is an oversold condition.
Ichimoku Kinko Hyo
Ichimoku Kinko Hyo is a technical analysis tool in Forex trading. It is used to predict future price patterns as well as future support and resistance levels.
Kijun sen indicates future prices.
- Prices above the blue line indicate an upward momentum.
- If the prices fall below the blue line, then the prices might be on the downward fall.
If the prices are below the Senkou span, then the lower line becomes potential first resistance while the upper senkou line becomes a potential second resistance.
An upward moving Tenakan-sen demonstrates an uptrend. A downward movement shows a downtrend. If the prices move sideways, it means that the market is trendless or ranging.
A sell signal occurs when the Chikou crosses the price chart from up going down.
