Common chart indicators are very helpful in foreign currency trading, or forex. These tools will help you evaluate the market and their other purpose is to minimize trading risks. Several common charts are available and they include Relative Strength Index, Bollinger Bands, Parabolic SAR, MACD and Stochastics.
Bollinger Bands.
- Is used to measure the market’s volatility.
- They act like mini support and resistance levels.
Bollinger Bounce
A strategy that relies on the notion that price tends to always return to the middle of the Bollinger bands.- You buy when the price hits the lower Bollinger band.
- You sell when the price hits the upper Bollinger band.
- Best used in ranging markets.
Bollinger Squeeze
- This is a strategy that is used to catch breakouts early.
- When the Bollinger bands “squeeze”, it means that the market is very quiet, and a breakout is eminent. Once a breakout occurs, we enter a trade on whatever side the price makes its breakout.
MACD
- Is used to catch trends early and can also help us spot trend reversals.
- It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
- Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
- MACD’s downfall is its lag because it uses so many moving averages.
- One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.
Parabolic SAR
- This indicator is made to spot trend reversals, hence the name Parabolic Stop And Reversal (SAR).
- This is the easiest indicator to interpret because it only gives bullish and bearish signals.
- When the dots are above the candles, it is a sell signal.
- When the dots are below the candles, it is a buy signal.
- These are best used in trending markets that consist of long rallies and downturns.
Stochastic
- Used to indicate overbought and oversold conditions.
- When the moving average lines are above 80, it means that the market is overbought and we should look to sell.
- When the moving average lines are below 20, it means that the market is oversold and we should look to buy.