The guy sitting next to you at work making all that money trading currency does not have a special Forex crystal ball. What he is doing to ensure continued profits in his trades is reading indicators and then basing his currency trading moves on them. Once you adopt this practice, how to increase your Forex trading account will no longer seem like such a mystery.
What are Indicators?
Trading currency requires knowing when to buy and when to sell and the sooner the better. This requires studying charts to see how the pair you are trading moves under current circumstances. These movements are known as indicators, and once you master them you will become that same Forex fortune teller as the guy in the next cubicle.
Identifying the Type of Market
When looking at a chart, the first thing you are going to want to pick out is the type of market you are dealing with. This will help you in determining the type of indicator you are going to use. A trending market is when the price of the currency is moving steadily, either higher or lower. These can be seen by long lines heading in one direction. Ranging markets are noted by strong resistance and support levels, where even with sharp fluctuations the currency is not breaking through.
When asked about indicators by new Forex traders, I always start with moving averages. This is a simple approach to analyzing indicators and learning where to enter and exit a trade. The chart is a line that is measuring the average prices for the pair over a specific amount of time. This “cleans” up the chart and makes it easier to read the trend. Watch for the price to fall below the average to make your buy and plan your stop for when the average begins to move in the opposite direction.
If you want to take full advantage of buying lowing and selling high, it would be a good idea to learn how to read the Relative Strength Index (RSI). This indicator shows when a currency is being bought or sold in large quantities, which is indicative of an impending turn around.
RSI is an oscillator, and plotted using values that range between 0 and 100. The lower the value the more of that particular currency is being sold and you can expect a turnaround upwards soon. The closer to 100 the number is the more is being bought. In this case, you will see a sudden drop as the buying of that currency caps out. By watching the RSI you can begin to plot when a currency is getting ready to make a sudden shift in value.
Stochastics work on the same principle as RSI except it uses two distinct lines to help you better plot your entry and exits. The %K and %D lines allow you to see when it is a good time to enter the trade. Look for the %K line to make the cross above the %D line. This is where you enter the trade, following the same direction as the trend shows.
Moving Average Convergence and Divergence (MACD) is a good indicator for both types of markets. This type of chart easily shows changes in the momentum of currency pairs. Once you are able to determine the type of market you are dealing with you can look for the crossovers and pick your entry and exit points. This is a busier looking chart that may be showing too much information at once for a new Forex trader. Learn the basics of reading the other indicators first before trying to understand MACD.
The advantage of learning how to work with different indicators is that it will make you an informed trader in any type of market. The Forex market is the most volatile to trade in, making it susceptible to sudden changes. If you want to participate in trading on a continuous basis it will be wise to learn how to work the indicators in any type of market.
There are hundreds of factors that can affect a currency’s value at any given time. Once you learn what these are and apply them to chart reading, you will have mastered the fundamentals of trading using fundamental analysis.
With practice, your technical analysis will meld perfectly with your fundamental analysis. This is the practice of reading financial announcements from around the world and using that information to predict currency pair movements. I learned how to combine them both by looking back in history and studying how my charts reacted to certain financial news. Little by little I was able to see where these movements could have been anticipated and began to structure strategies that incorporated both types of analysis.
As your knowledge of reading indicators grows, you will begin to learn how to combine different methods to give you an even clearer glimpse into the future of your currency pair. When you have mastered this type of trading, it will be you whose crystal ball reading skills will suddenly be in question by new Forex traders.