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When your forex trading adventure begins, you may come across a range of different trading methods. However, most trading opportunities can be easily identified by one of four chart indicators. Once you know how to use Moving Average, RSI, Stochastic and MACD indicators, you can execute your trading plan like a pro. You also get free strengthening tools so you know how to use these forex indicators every day to identify trades.
Find the best trading ideas and market forecasts from DailyFX.
The Benefits of a Simple Strategy
Traders tend to overcomplicate things when they start to enter the Forex market. This fact is unfortunate, but undeniably true. Traders often think that complex trading strategies with many moving parts must be better when they should focus on making things as simple as possible. Because a simple strategy allows for quick reactions and less stress.
If you are just starting out, you should look for the most effective and easiest strategy to identify trades and stick with that method.
Discover the Best Forex Indicators for a Simple Strategy
One way to simplify trading is to develop a trading plan that includes chart indicators and some rules on how to use those indicators. In keeping with the philosophy that simplicity is best, you should familiarize yourself with four simple indicators, one or two at a time, to identify trade entry and exit points:
- moving average
- RSI (Relative Strength Index)
- slow random
- MACD
Once you trade a live account, a simple plan with simple rules will be your best ally.
Using Forex Indicators to Read Charts for Different Market Environments
There are many fundamental factors in determining the value of one currency relative to another. Many traders choose to view charts as a simplified way of spotting trading opportunities – using forex indicators to do so.
If you look at the chart, you will notice two common market conditions. These two environments are either range-bound markets with strong support and resistance levels, bottoms and ceilings that prices will not break through, or trending markets where prices are steadily rising or falling.
Using technical analysis, you as a trader can identify range bound or trending environments and then find more likely entries or exits based on their readings. Reading indicators is as easy as pasting them on a chart.
Trading with Moving Averages
One of the best forex indicators for any strategy is the moving average. Moving averages make it easier for traders to find trading opportunities in the direction of the overall trend. When the market is trending up, you can use a moving average or multiple moving averages to identify the trend and the right time to buy or sell.
A moving average is a drawn line that simply measures the average price of a currency pair over a period of time, such as the price movement over the past 200 days or a year, to get an idea of overall direction.
Learn Forex: GBPUSD Daily Chart – Moving Average
You’ll notice that just adding some moving averages to the chart above creates a trade idea. Identifying trading opportunities with moving averages allows you to view and trade momentum by entering when a currency pair is moving in the direction of the moving average and exiting when the pair begins to move in the opposite direction.
Trading with RSI
The Relative Strength Index or RSI is a simple to use oscillator. Oscillators such as the RSI can help you identify when a currency is overbought or oversold, making a trend reversal possible. For those of you who like to “buy low and sell high”, the RSI might be the indicator for you.
The RSI can also be used in trending or range-bound markets to find better entry and exit prices. When the market has no clear direction and is moving, you can take buy or sell signals as seen above. When the market is trending, it becomes more obvious in which direction to trade (advantage of trend trading) and you only want to enter the trend direction when the indicator recovers from the extreme.
Since RSI is an oscillator, it is represented by a value between 0 and 100. The 100 level is considered overbought and likely to reverse down, while the 0 level is considered oversold and reversing up is the order of the day. Once an uptrend is spotted, you should identify an RSI reversal or oversold from below 30 levels before re-entering the trend direction.
Trading with Stochastics
Slow Stochastic is an RSI-like oscillator that can help you locate overbought or oversold conditions, which can lead to price reversals. Unique to trading with Stochastic are the two lines, the %K and %D lines, which mark our entry.
Since the oscillators show the same overbought or oversold readings, just look for the %K line that crosses the 20 level across the %D line to spot a solid buy signal in the direction of the trend.
Trading with the Moving Average Convergence & Divergence (MACD)
Sometimes referred to as the king of oscillators, the MACD can be used well in trending or range-bound markets to visually indicate changes in momentum due to the use of moving averages.
There are two things to keep in mind when taking signals from this indicator after the market environment has been defined as a range or trade. First, you want to find the lines relative to the zero line, which indicate the rise or fall of the currency pair. Second, you want to identify the cross or crossover of the MACD line (red) and the signal line (blue) for buy or sell trades, respectively.
As with all indicators, the MACD is best paired with an established trend or range market. Once a trend is identified, it is best to make a MACD line crossover in the direction of the trend. Once you enter a trade, you can place your stop loss below the last extreme before the crossover and set your trade limit to twice the amount you risk.
Learn More about Forex Trading with our Free Guides
If you want to further your forex trading knowledge, you may want to check out one of our free trading guides. These in-depth resources cover everything you need to know about learning forex trading, such as: B. Reading exchange rates, planning your forex trading strategy and how to become a successful trader.
You can also sign up for our free webinars to get daily news and trading tips from the experts.
Happy Trading!
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