A chart-driven trading market?

[By J. Honi]

Foreign currency exchange, or Forex, is a chart-driven trading market that uses an electronic network to quickly process currency trades. The action is fast-paced and traders often use technical indicators on their charts to help predict price movement. Hundreds of indicators are available in Forex trading, and most charting packages offer an extensive list from which to choose.

But, some Forex indicators are particularly popular and should be learned first.

Moving Average

A moving average is a quick visual representation of the overall bias in Forex price action. The moving average line is created by averaging the closing prices of the last many days or minutes and plotting this calculation on each bar of a chart. As these plotted points are connected, a line is drawn. A moving average sloped positively suggests an upward trend, while a declining moving average suggests a bearish trend. According to Forex Realm, the moving average indicator is used more often than any other indicator. Its interpretations are vast and each trader may develop his own strategy. Some moving averages act as obstacles for price action. In an up trend, a 20-period moving average may lead to price bounces every time a decline brings a Forex price down to this average.

Moving Average Convergence/Divergence

The Moving Average Convergence/Divergence (MACD) is the most popular indicator used in Forex trading, according to Forex Realm. This indicator uses two moving averages. As prices increase in momentum, either up or down, the distances between two moving averages will also increase. The MACD measures this difference and plots it as a separate line in a graph below the price chart. Momentum can thus be quantified and visualized quickly. The length of the two moving averages may vary, and the interpretation of this calculation has many implications. As a tool to recognize divergence, this indicator is unmatched. When prices rise but momentum simultaneously falls, this divergence often leads to swift price reversals.

Stochastic

The Forex Indicators Guide lists the “stochastic” indicator as one of the top two Forex indicators. This indicator plots a graph under the price chart just like the MACD, and many traders interpret the two in similar ways. However, the stochastic derives its calculations using a much more complex formula. The formula analyzes the closing position of prices in relation to previous prices, and in this way offers its own definition of price momentum. Unlike the MACD, the stochastic has upper and lower limits of 100 and 0. Near these areas, the Forex market analyzed is said to be “overbought” or “oversold.” Traders often use these moments to predict price reversals. As a note of caution, however, a market can remain overbought or oversold for much longer than a trader expects.

More:

The Foreign Exchange Market Explained

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Filed under: Investing | Tagged: Forex, Top FOREX Indicators | 3 Comments »