Forex Technical Trading Strategy
How to Trade Forex with Oscillators and Momentum Indicators
Investors in today's forex market can count on a variety of analysis tools to help them better guide their decisions and develop a consistent and systematic strategy, therefore minimizing impulsive decisions that can be devastating in this volatile market.
Such indices are mainly divided into two separate groups, oscillators and momentum indicators: the former try to predict a future change in trend, while the latter help assessing whether a trend that has already started will either continue or revert.
Oscillators in Forex
Some of the most widely used oscillators include:
- Stochastics: an oscillator that indicates whether the market is currently in an 'overbought' or 'oversold' phase. When the stochastics graph goes beyond a certain threshold, investors' reactions are usually to sell (overbought) or buy (oversold).
- Parabolic SAR: helps identifying the end of a trend in a timely fashion on a bearish or bullish market. It is plotted on the candlestick graph, and where the index crosses the candlestick graph itself, this is generally a seen as a symptom of a trend change.
- Relative Strength Index (RSI): similarly to stochastics, indicates the strength of the current trend on a scale from 0 to 100 — 0 to 50 for bearish, 50 to 100 for bullish.
Momentum Indicators in Forex
Some of the most common momentum (or lagging) indicators include:
- Simple Moving Average: average value of the last n candlesticks, where n is a configurable parameter.
- Exponential Moving Averages: similar to the simple moving average, but the most recent data has a much stronger influence over the value of the index, which means this indicator is much more sensitive to changes in value.
Combining Two or More Indices to Find Your Strategy
The very high number of indices available makes it unpractical to build an investing strategy based on the majority of them: forex investors are therefore required to pick and choose the tools that seem best suited to their own needs and bring the best results, and to figure out how to combine them all to create a profitable investing strategy.
An example of combining two indices to obtain a more accurate trend prediction is the so-called "moving average crossover": exploiting the characteristics of simple and exponential moving average — one highly subject to recent changes in trend, the other more equally weighted on previous data — it is possible to plot both on the same chart and decide to enter or exit a trade when the two cross each other.
Beyond Indexes: Fibonacci, Pivot Points, Elliott Waves
Technical analysis tools are not confined to indices only. There is a wealth of other mathematically or statistically derived factors, patterns, trend lines among which Fibonacci series, pivot points and Elliott wave theory applied to forex are just a few, valid ones.
Some of them — particularly those linked to the Fibonacci sequence — are speculated to hold true only because of their very widespread use by investors of all the world, which ends up influencing the market itself.
Technical Analysis vs. Fundamental Analysis
Even those who believe to have found the perfect combination of oscillators and indicators that can reliably anticipate market movements should never ignore fundamental analysis, the technique consisting in trading based of market news, which is often preponderating in short term trades: the right forex strategy is a wise mix that constantly keeps the two in consideration, without ignoring or underestimating their capabilities.
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