Wednesday January 19, 2011 07:16
Five Technical Indicators Used by Experts
Posted by Matteo Bruno as Technical Indicators
By Sam Perdue
If you have just learned technical analysis, you may be overwhelmed by all the indicators that you have to base your predictions on. You may not be able to use all the indicators and be able to make a decision on time, so we’re listing down the 5 best technical indicators used by forex trading experts.
If you are a beginning trader, you may want to start with the simplest indicator. The moving average, though simple, is one of the preferred technical indicators of experts. With moving averages, you compare the averages of charts that span two different ranges. For example, you may compare a 7-day average with a 30-day average. Look at the way the two averages cross over. You can predict a bearish market, if the crossover comes from up to down, and you can predict a bullish market, if the crossover comes from down to up.
This technical indicator operates on the belief that a market’s value can go up or down depending on two standard deviations. Each of the standard deviations is plotted on either side of a moving average graph of the prices. So basically, Bollinger bands are used to gauge whether a price is considered high or low based on the price history.
Relative Strength Index (RSI)
The relative strength index, or RSI, is the relative strength of the security’s price when compared to past prices of that same security. The RSI is used to determine whether a security is being overbought or being oversold. In a period of usually 14 days, you will be looking at bearish and bullish changes in the prices. You have to divide the sum of the bullish trades by the sum of the bearish trades. The answer is an index from 0 to 100. If the number is above 70, then the security is overbought (bearish). Similarly, if the number is below 30, then the security is oversold (bullish).
The stochastic indicator is a good tool for determining whether the market is strong or weak. This technical indicator shows that if the price is rising during the trading day, it is more likely that it will end up near the maximum price for the day. Accordingly, if the price is falling during the trading day, it is also more likely that it will end up near the minimum price for the day. This indicator is best used as a timing tool and can show trend changes where you can base your investment moves on. The stochastic indicator is best used together with the RSI.
Moving Average Convergence Divergence (MACD)
The MACD is a momentum gauge that can be computed through finding the difference between two exponential moving averages. The MACD closely follows the trends. The MACD is different from moving averages in the sense that with exponential moving averages (EMA), much more weight is given on the more recent prices than the rest of the prices plotted on the graph.
If you look further, you will find many other helpful indicators. However, the ones we’ve listed here have been the most tried and tested by experts. By using or combining any of these technical indicators, you can zero in on the best trading move.