Forex Trading Using Technical Indicators
One of the main cornerstones of your new Forex Trading System will be a method or technique that can help you select the entry and exit points of all your trades. There are a large number of Technical Indicators that can be used to assist you in achieving this task including Stochastics, RSI, Bollinger Bands, MACD, Moving averages plus many more.
Unfortunately, as none of them can predict the Forex Market with anywhere near 100% accuracy, a recommended way forward would be to select one Technical Indicator at a time and then to determine its win:loss ratio and expectancy value as will be shown later in this course. There is a great amount of free information on the internet about Technical Indicators. Here are brief descriptions of two of them:
1. Simple Moving Average (SMA)
This indicator is calculated by dividing the sum of the past N period closing prices by the number of periods N. This is a lagging indicator with which traders try to use past price data to forecast future movements. The moving average is more accurate when used with longer number of periods. However, this also has the disadvantage of making it slower to react to new price changes.
2. Exponential Moving Average (EMA)
The Simple Moving Average is a very good tool for quickly establishing Forex market trends. However, it does not cope very well with rapid price movements (spikes) because it gives just as much emphasis to older price data as to new. As traders are recommended to base their technical analysis on the latest data, the Exponential Moving Average indicator provides an improvement because its formula places more emphasis on recent currency quotes.
However, it is very important for you to realise that all technical indicators have inherent problems. One of the major ones is that most of them, if not all, were designed well before the birth of Forex and as such do not cope very well with its violent volatility. They were intended to deal with trading conditions that are the equivalent of you paddling a canoe at the seaside in light breezy weather. However, they do not perform very well in the tsunami type conditions that Forex is capable of generating. Consequently, these technical indicators really need to be updated and modified in order to cope with these new conditions.
However, this solution is not really a possibility unless you are brilliant at mathematics. A more workable way forward is to integrate your chosen technical indicators into a complete Forex Trading Strategy as will be shown in this course.