There are hundreds of technical indicators. This chapter teaches you which ones to use
to confi rm your trading strategies.
By now, you can see that trading forex involves making a sequence of decisions. You begin by fi rst deciding which direction to take the next trade. This decision is based on assessing sentiment and trend direction. The second step is deciding where to enter the trade. Entering the trade off a trend line or Fib line is an example of the basis for this decision. But the third key step is pulling the trigger-deciding to put on the trade. This is where technical indicators come into play and become a critical tool to confirm your analysis and instincts.
The list of potential indicators used to help shape forex analysis is quite extensive. Many technical indicators used for equity and futures markets do not apply to forex because forex trading does not provide volume data. The new trader is likely to become confused
as to which indicators to use. This chapter will guide you.
Average True Range
Commodity Channel Index
Percent R (Williams %R)
Rate of Change ( ROC )
Relative Strength Indicator (RSI)
Standard Deviation (StdDev)
FStoch (Fast Stochastic)
SStochastic (Slow Stochastic)
How Many Indicators do You Need?
The supply of indicators is plentiful. But many measure the same phenomenon. The challenge of the forex trader is to use those that provide confirmation of different aspects of the price action. Whatever indicator is used, you need to be able to confirm the volatility, trend direction, and price reversals.
Know the Volatility for Confirming Direction Change
When a price varies between its highs and lows and its open and close, you can measure that movement in terms of its volatility. Zero volatility does not mean no movement in prices. It means that there has been no variation. For example, if the weather in an area had a daily high of 85 and a low of 65 for a week, there would be zero volatility. In forex trading volatility represents great opportunity. During any day, forex prices move 0.5 to 1.7 percent between highs and lows. Prices may range more than 100 points in several hours.
Measuring volatility is important because all price movements start with greater volatility and lose it. So when volatility is at a peak, it’s a sign that the ability to keep moving up or down has declined. Therefore, traders who are seeking confi rmation to buy a currency pair will fi nd that, when the volatility peaks during a selling trend, it’s a sign of a reversal. Those looking to sell a currency pair will look for a peak in volatility while the price is still in an upward trend.
Note: Please see Abe’s book “Understanding Forex: Trading to Win” for the remainder of the chapter. Copies can be obtained from the Freebie section of forexhound.com