Three Technical Indicators Every Forex Traders Should Use
Technical analysis is more than reading charts. Of course, charts are a big part of this type of analysis. But price movement is only part of the story. Technical indicators or studies help to interpret the price movement of a currency. They indicate whether the price movement is strong or likely to reverse. They can even predict the next price movement of a currency.
There are dozens of different types of technical indicators. Every trader uses his or her favorites. Yet most traders will agree that there are three indicators that every currency trader must use.
- Moving Average Lines
Moving average lines are one of the best indicators that show whether a trend is bullish, bearish, or nonexistent. They also show support or resistance levels. This information can be provided at a glance. At the support level, the price is likely to start moving higher while, at the resistance level, the price is likely to start falling. The 20-period moving average line is standard for currency traders.
- Bollinger Bands
Bollinger Bands are trading bands that are placed around a currency price and the 20-period moving average line. They show whether a currency is trending and the points at which a price movement might reverse. Bollinger Bands are excellent for illustrating support and resistance as well as the level of volatility (or price change) of a currency. Support is usually found at the lower Bollinger Band while resistance can be found at the higher Bollinger Band.
- Average Directional Index (ADX)
This indicator works well with both moving average lines and Bollinger Bands. The ADX shows the strength of a trend. If a trend is strong, it is likely to continue. If it is weak, it is likely to reverse. Traders have different figures for the strength of a trend. An ADX level that is below 10 shows that the currency is trading in a tight range or is not trending at all. An ADX level above 30 shows a moderate strength trend. An ADX above 40 indicates a strong trend.
Beginning traders will be bombarded by a large number of technical indicators. But dont try to use all of them. Starting with the three indicators in this article will provide a good foundation for charting. Using candlesticks in conjunction with the above indicators will provide an excellent view of the market.