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How to Trade Forex Using Technical Indicators
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Posted on July 1st, 2020
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The forex markets can be successfully traded using technical analysis which is the study of past price action to gauge future movements of the markets. There are three popular categories of indicators that are actively used to help predict future price movements. These include trend following, momentum and mean reversion. You can use a single indicator to help you forecast the future direction of a currency pair or even multiple technical indicators. Here are 3 technical analysis strategies to help you trade the forex markets.

Trading Forex with Technical Indicators

The forex markets, provide an excellent space to use technical indicators. The robust volume in the forex market helps answer the question of what is forex trading liquidity. Liquidity tells you how easily you can enter and exit a market. Technical indicators work very well in very liquid markets such as the forex markets.

How to Gauge a Trend

Forex markets generally move from range to range. During this process, a currency pair will break out, accelerate higher, begin to trend, decelerate, and then consolidate. Alternatively, a currency pair could break down, accelerate lower, begin to trend, decelerate, and then consolidate. While a currency pair is trending in one direction or another, it provides an opportunity to generate gains. One of the best ways to capture a trending market is to use technical analysis tools that are geared to measure a trend. One of the most popular is the moving average crossover strategy.

A moving average is the average of a certain number of periods. For example, a 20-day moving average is the average of the last 20-days. On day 21, the first day of the average is dropped from the calculation. Your brokers charting software is likely to provide you with moving averages as a study that can be used on charts. A moving average crossover strategy provides a signal when a short term moving average crosses above or below a longer-term momentum average. For example, when the 10-day moving average crosses above the 50-day moving average a short-term uptrend is considered in place. Alternatively, when the 10-day moving average crosses below the 50-day moving average, a short-term downtrend is considered in place.

 

How to Trade Forex Using Technical Indicators

 

Using Momentum

When a trend begins to accelerate, positive or negative momentum begins to accelerate. To gauge positive or negative momentum, you can use a technical indicator called the Moving Average Convergence Divergence Index (MACD) to find changes in momentum. The MACD uses several moving average to evaluate momentum. As a default, the MACD looks at the difference between the 12-period moving average and the 26-period moving average and compares that difference (the MACD line) to the 9-period moving average of the difference (called the MACD signal line). When the MACD line crosses above the MACD signal line momentum is accelerating higher. When the MACD line crosses below the MACD signal momentum is beginning to accelerate lower. You can also see the crossover using the MACD histogram.

Too Much Acceleration

When the markets accelerate too quickly they can become overbought or oversold. The fast stochastic is a momentum oscillator that measures whether an asset is accelerating too quickly. The indicator analyzes the last 14-day period and moves from 1 to 100. Levels on the fast stochastic below 20, are considered oversold, while levels above 80 are considered overbought. While prices can remain overbought or oversold for a while, the fast stochastic provides traders while a measurement that is a warning signal.

The Bottom Line

Technical indicators are good tools to help gauge the future direction of a currency pair. There are trend-following tools, momentum tools, and overbought and oversold techniques. You can use these trading indicators on their own, or in conjunction with one another to gauge the future direction of the forex markets.

 

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