How to Use Forex Indicators
The foreign currency exchange market, or Forex, provides traders with the opportunity to speculate on changes in currency valuation. The Forex market is one of the largest in the world with more than 35 times the asset value of the New York Stock Exchange. Additionally, it is a 24-hour market in which participants may trade at any time. Many technical indicators exist to aid in the process of price prediction. Use of these indicators can be quite complex, but the basics are easily learned.
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Instructions
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Open your Forex trading platform and plot a chart of any currency pair you wish to trade.
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Apply the moving average convergence/divergence---or MACD---indicator to the chart. This is one of the most popular Forex indicators. The MACD will appear below the chart as a new graph that analyzes the price action above it. Technically, the MACD line represents the difference between two moving averages of price action. As the MACD increases, the distance between these averages is getting larger, which indicates faster price momentum.
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Imagine a line drawn to connect the low points on the MACD graph. This line represents a trend in momentum. Some charting platforms allow you to physically drag a line on the MACD graph with your mouse, but this is not necessary if you can visualize it quickly.
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Compare the price behavior of the Forex currency with the momentum line of the MACD indicator. A divergence between the two often signals imminent price reversal. A rising MACD over time that is not accompanied by rising Forex prices can be an early alert to a sudden rise in the price action. Likewise, a declining MACD can signal an imminent decline in prices.
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Add the stochastic oscillator and relative strength index to the Forex chart. The stochastic oscillator is an indicator of speed of changing or the impulse of price. The RSI compares two market indexes. Each of these uses its own formula to predict price momentum. Note, however, that the visual interpretation of these is similar to the MACD, with some subtle differences.
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Watch the behavior of the MACD, stochastic and RSI indicators over time to acquire a feel for their reaction to price behavior. Then, choose the indicator you most prefer and remove the others, as the redundant information is not necessary.
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Trade with your chosen indicator and eventually you will understand the many nuances of its information. If necessary, use a Forex simulation account so you do not risk real money as you learn how to trade with the new indicator. Eventually you will discover meaningful predictors that substantially improve your Forex trading.
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Tips & Warnings
No technical indicator is foolproof. These indicators are only guides to help decipher the complex volatility of financial markets. Always be cautious in your trading, even when using a Forex indicator.
References
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