5 Technical Analysis Tools to Use in Forex Trading

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BLOG OUTLINE

  • Section: Support and Resistance
  • Section: Moving Averages
  • Section: Relative Strength Index (RSI)
  • Section: Trend lines
  • Section: Fibonacci Retracements

BLOG INTRODUCTION

Forex trading analysis can sometimes be challenging. How do you select the best forex trading system? That question is the same one most aspiring traders ask themselves. It is not easy to find the right forex technical analysis tools. But it is important to have the best forex indicators for your strategy to ensure successful forex trading results in the short and long term future.

We all know how much effort traders are taking, by investing their money in the Forex Market.  Therefore, today we have reviewed several Forex Trading technical analysis tools, and we found out what are the best five technical analysis tools that every forex trader should take a look at before starting their Forex Trading career.

SUPPORT AND RESISTANCE

The support and resistance forex trading indicator can be beneficial in the forex market. It is based on the basis that market movements are usually predictable. If you want to use it, then you will need to understand the market basics first.

The support and resistance levels on a chart can be determined by plotting where price action has encountered a resistance level and also where price action has encountered a support level. In this case, the support level is where the price has found comfort and the region acts as the floor of the price. Therefore, it signals a sign to buy. The resistance level is where the price has encountered rejection and the region is considered as the ceiling zone for the price and it signals a sell option. When price action encounters one of these levels, then it is said to have found support or resistance.

The support and resistance forex trading indicator can be used for different purposes. It can be used to determine when to buy or sell a particular currency pair. This is because when the price moves above one of these levels, it indicates that there is strength behind the move and therefore you should buy at that point in time. When the price moves below one of these levels, however, then there is weakness behind the move and therefore you should sell then.

MOVING AVERAGE

Moving Average is a widely used forex trading indicator. It is the average price of a currency pair over the given period. It has many versions, such as simple moving average (SMA), exponential moving average (EMA), weighted moving average (WMA), and more. The most popular indicator is EMA, which is used in many indicators, for example, MACD or Relative Strength Index (RSI).

The MA indicator is calculated by adding the last price to the sum of all prices from the first one and dividing this value by two. This formula gives us a smoothed line showing the direction of the market trend.

When applying MA to forex trading you should be careful with its parameters. First, you need to choose time periods that are convenient for you to trade. Generally, traders use time frames from 5 minutes to 1 month for intra day trading and 1 day to 6 months for swing trading or long-term trading. The most important thing is not choosing too small or too big periods; otherwise, you will receive false signals. For example, if you want to trade with 5 minute chart then set your period to be at least 30 minutes so that it will include at least 10 candles. 

RELATIVE STRENGTH INDEX (RSI)

The relative strength index (RSI) is an indicator used to analyse overbought and oversold conditions in foreign exchange trading.

An overbought condition occurs when a currency pair has been bought so much that its price exceeds the average value of the market—in other words when it becomes more expensive than it should be. In a forex market, this means that traders are buying up more of a currency than they should be. An overbought condition indicates that a trader might want to sell off some of their holdings in order to secure profits and prevent losses.

In contrast, an oversold condition occurs when a currency pair has been sold so much that its price falls below the average value of the market—in other words when it becomes cheaper than it should be. In a forex market, this means that traders are selling off more of a currency than they should be. An oversold condition indicates that a trader might want to buy up some of the currency being sold before its price recovers, thereby ensuring profits from holding on to their holdings.

The RSI can help traders identify these opportunities: if the RSI is above 70, it’s likely in an overbought state; if it’s below 30, it’s likely in an oversold state and as a trader, you should take the required steps to prevent losses. 

TREND LINES

Trend lines are a simple but powerful tool for forex traders, and they can be your secret weapon when it comes to timing your trades.

Trend lines are created by connecting two price points and then extending the line into the future. These lines can be used to connect a series of lows or a series of highs. Once these lines are drawn, you can use these lines as a rough guide for when you should enter and exit trades.

A trend line is invalidated if the price of an asset crosses through the line on your chart and continues in the opposite direction from what was predicted by the trend line. This is called a “breakout.” To determine whether this breakout will continue, you should wait to see if another candle appears on the other side of the trend line. If it does not, then it’s likely that this breakout will continue and you should adjust your trading strategy accordingly.

FIBONACCI RETRACEMENTS

Fibonacci retracements are a popular forex trading indicator. Here’s how they work!

The technical analysis indicator, the Fibonacci retracement, was created by a trader named Ralph Nelson Elliott in the 1930s. It is applied to price charts of stocks, bonds, commodities and currencies. The theory behind it is that stock prices move in waves that tend to follow mathematical ratios. In the case of Fibonacci retracements, these ratios are derived from the Fibonacci sequence of numbers, which begins with 0 and 1 and continues with each consecutive term adding up to the sum of the previous two terms.

The most common use for this indicator is to predict where a stock price will reverse after an advance or decline. The indicator attempts to pinpoint places on the chart where the price of a stock or commodity will reverse or correct itself after a prolonged trend. The theory is that once these levels are breached in one direction or another, it becomes more likely that the stock will continue moving in that direction until it reaches its next support/resistance level.

If you’re considering using this indicator, you should note that several variations exist. Some traders use only two points while others use three or more points. However, all versions will give a close direction and indication as to what is about to happen in the market.

TAKEAWAY

We have tried to give a fair overview of the five most widely used technical analysis tools in forex trading. Hopefully, we have helped you understand and better use these tools for your own trading needs. We all have our own preferences, but you should be able to identify which one is right for you after reading this article.

Nairobi School Of Forex

Nairobi School Of Forex

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Nairobi School of FOREX trading offers first-class and very comprehensive training programs to both retail and institutional clients in Forex Markets, Stock Indices, Commodities like Gold and Oil, from beginner level to advanced level

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