In this article, we are going to talk about three most important technical indicators for you to start developing your own strategy and do successful trades.
It is not an exaggeration to say that hundreds of technical indicators might circulate around the forex trading world. Besides the dozens already embedded in our trading platforms, free and paid indicators are developed for forex traders to elevate their ease and accuracy. The wide array of options is useful for experienced traders seeking to boost their methods' quality, but they could seem overwhelming for beginners.
In this article, we will talk about three most important technical indicators as follows:
- Long-term Moving Averages: This indicator can identify the best times to enter and exit the market to maximize profits.
- MACD: It helps to identify the current trend and predict future trends.
- Chart Patterns: It can be used to identify changes in price direction.
Let's see the detailed explanation below.
1. Long-Term Moving Averages
Long-term moving averages such as SMA-100 and SMA-200, or the much smoother modification of EMA-100 or EMA-200, are commonly known as long-term price trackers. It has multiple uses, and you will rarely see anyone trade without this type of trendline, no matter their trading style. Forex traders might use other indicators to decide entry and exit points, levels of stop loss and take profit, etc. Still, long-term moving averages are most beneficial to avoid fake signals and detect significant price movements.
One useful thing to remember is that long-term moving averages could mark significant breakouts and rebounds, indicating the best times to gain the best market profit. A few weeks ago, a trading journal entry on this site recorded an event where a trader ordered to buy when price touched EMA-200 line. Although, at the time prices are walking downward, EMA-200 line is still going up. And guess what!? Price bounced up from the EMA-200.
However, it is a lagging indicator that cannot accurately tell you whether price will go up or down, so use other indicators to confirm whether you should open long or short positions. After all, moving averages are better used in companion to other indicators.
2. MACD
MACD (Moving Average Convergence Divergence) is the most widely used indicator among its fellow oscillator-type indicators. As its name suggests, the MACD defines the current trend and predicts future trends by utilizing the convergence and divergence of two moving averages.
To define whether the trend is bullish or bearish, the MACD column is divided into two parts by 0.0 line. When price breaks 0.0 line downward, price will move lower; while if price breaks 0.0 line upward, price possibly is going to move higher.
Besides that, MACD could also define whether a certain pair has become overbought or oversold. In the picture, when there is a wide gap between the green histogram and the red line under 0.00 line, it means that there is an oversold condition where prices will go up. Similarly, when such gap happens above the 0.00 line, it means that there is an overbought condition where prices shall go down.
3. Chart Patterns
Patterns are quite unlike the first two technical indicators. Patterns are considered one of the most reliable tools to detect changes in price direction, but it is not an application that has to be installed on the chart individually. Instead, chart patterns are what we see on the chart everyday line graph or candlestick forms a certain pattern.
There are various patterns, but the most famous might be the triangle pattern in which price movement forms a triangle on the chart. There are three kinds of triangle patterns: symmetrical, ascending, and descending. There is also a Head and Shoulder pattern consisting of a significantly high resistance as the head preceded by a lower resistance, followed by similarly lower resistance as the two shoulders.
You could see that in the picture above, the EURUSD headed to a fall following the Head and Shoulder pattern. That is what the Head and Shoulder pattern signifies.
Other patterns are Double Tops and Double Bottoms, Falling Wedge and Rising Wedge, etc. Each signifies different trend. When you spot these kind of patterns, remember what they mean. Noticing these chart patterns are important in your trades, particularly to determine whether the bulls, or conversely the bears, are going away or entering the market.
Candlestick could also do that, but it is quite difficult to remember all variations of candlestick as it can number in dozens. Compared to candlestick patterns, chart patterns are far more easier to remember.
Final Word
The three indicators above are crucial in technical analysis for several reasons.
Firstly, these indicators are relatively easy to understand and utilize, making them accessible to traders of different skill levels.
Secondly, they provide valuable insights into identifying trends and potential trading opportunities across various markets.
Lastly, extensive research and empirical evidence have demonstrated their effectiveness in predicting future price movements.