Technical Analysis Tools (+)

MACD

MACD means Moving Average Convergence Divergence and it is a trend-following momentum indicator. It was developed by Gerald Appel in the late 70s.

MACD at a Glance

• Name: Moving Average Convergence Divergence (MACD)
• Usage: Identifies Price Trend and Forecasts Reversals
• Trading Signals: When there is an important divergence between the price slope and the MACD slope, a price reversal may be on the way
• Timeframes: Best used in 30-Minute, 1-Hour, 4-Hour, and Daily charts
• Standard Settings: 12,26,9
• Crucial Levels: In general it is crucial when the MACD Line crosses up or down the Signal Line

The MACD is a truly leading indicator and that means that it is able to identify the beginning of a price trend. MACD is considered one of the best technical analysis indicators but be aware that during choppy market conditions it may generate false signals.

MACD Explained

MACD is a momentum indicator used for following the short-term price trend and for identifying upcoming price reversals. MACD is a lagging indicator, therefore, it can inform us accurately about price divergences but it should be used with caution as a signaling machine

In general when the MACD EMA Lines are positive (above zero) then there is a bullish activity on the market. On the contrary, when the MACD EMA Lines are negative (below zero) then there is a bearish activity on the market

-MACD is a very useful tool in order to identify potential price reversals

-The MACD divergences can pinpoint reversals better than any other technical analysis tool

-It is better to apply MACD using the standard settings (12,26,9) in M30, H1, and H4 charts

Read more: MACD Indicator and Forex Trading

Pivot Points When Trading Forex

Pivot Points at a Glance

• Name: Pivot Points
• Usage: Determines Resistance & Support / Forecasts Trend Reversals
• Trading Signals: Not Accurate
• Timeframes: from 1 hour to 1 month
• Standard Settings: The average price of the previous day’s High, Low, Close
• Crucial Levels: When the price of an asset reaches close to a Pivot Point

Pivot Points Explained

Pivot Points are frequently used by Forex professional traders. A pivot point is calculated as the average price of high, low, and closing price based on the previous trading day. Some traders are using also the opening prices to calculate the pivot point, therefore, the pivot, in that case, is the average price of Open, High, Low and Close.

Technical Behavior:

-The price of financial assets tends to test heavily the pivot points before move higher or lower, therefore, pivots determine support and resistance levels

-If the price of an asset is trading above the pivot point is thought a bullish market and if it is trading below the pivot point indicates a bearish market

-The accuracy of trading signals based on pivot pivots increases at times when a formation of a Japanese candlestick is also identified

Read more: Trading Pivot Points

Bollinger Bands When Trading Forex

The Bollinger bands can provide an easy framework for price trend verification and trading signal generation.

Bollinger Bands at a Glance

• Name: Bollinger Bands
• Usage: Determines Price Volatility / Evaluates Trend / Generates Trading Signals
• Timeframes: Trading from 1 minute to 1-Hour charts (Applied best on 1-Hour Chart)
• Standard Settings: (20,2)
• Crucial Levels: When the price crosses above or below the two main bands

The Bollinger Bands developed by John Bollinger is a technical analysis tool for measuring price volatility, evaluating price trend and generating trading signals, all in a fully visualized approach.

Bollinger Bands Explained

The tool is usually used by day-traders and works best when it is applied in 1-hour charts. The Bollinger bands can be used for trading any financial market or asset and can generate tens of daily signals (standard settings 20,2). When the price of an asset crosses above the upper or below the lower band then the price trend is likely to pause or reverse. The Bollinger Bands offer also traders a quick map of price volatility.

The tool consist 3 parts, two bands and a curve:

(1) Upper Band (standard deviation)

(2) Lower Band (standard deviation)

(3) Middle Curve (moving average line)

The two bands (upper and lower) represent the readings of a standard deviation and therefore consists a statistical measure. The middle curve is a moving average (in standard settings it is a 20-period moving average). In general, when the price of an asset moves outside outer bands (higher or lower) then it will likely retrace back to at least to reach the central Bollinger Curve.

Read more: Bollinger Bands and Forex Trading

RSI Indicator

 The Relative Strength Index is classified as a momentum oscillator and was developed by Welles Wilder in his 1978 book, "New Concepts in Technical Trading Systems"

 

RSI at a Glance

• Name: RSI Oscillator
• Usage: Determines Overbought/Oversold Markets
• Trading Signals: Signals via the Divergences between RSI and Price Chart Slopes
• Timeframes: From 5 min up to 1 month
• Standard Settings: 14 periods
• Crucial Levels: RSI below 30 indicates an oversold market and above 70 indicates an overbought market

The Relative Strength Index (RSI) is a very popular technical analysis tool measuring the magnitude of a price movement and aiming to identify Overbought/Oversold Markets. RSI can be proved a reliable technical indicator for day-traders. It is better to combine RSI with an additional indicator in order to be sure about the continuation or the reversal of the master trend.

Technical Behavior:

■ When the price of a financial asset is trading in an uptrend and RSI crosses from below 30 to above 30 it is considered as a strong buy signal (call option).

■ When the price of a financial asset is trading in a downtrend and RSI crosses from above 70 to below 70 it is considered as a strong sell signal (put option).

■ In general RSI below 15 indicates a solid oversold market and RSI above 84 indicates a very strong overbought market.

Read more: Trading with RSI

Parabolic SAR when Trading Forex

The Parabolic SAR is widely used Forex traders as it offers an easy way of determining instantly the price trend.

At a Glance

• Name: Parabolic Stop and Reverse (SAR)
• Usage: Price Trend / Reversal Identification
• Timeframes: From 1-minute to 1-Month Charts
• Standard Settings: 20% Max Step and 2% Acceleration Factor (.02, .002)
• Crucial Levels: When the SAR dots change position (Moving Upper or Lower the Price Chart)

The Parabolic SAR is a directional indicator used to determine the price direction of any financial asset. It was developed by J Welles Wilder Jr.

Parabolic SAR Explained

The Parabolic SAR is widely used as an easy way of determining the price trend. Furthermore, it provides an easy framework for identifying when to enter and when to exit the market. As an indicator, it is fully visualized as it plots a series of dots or dashes which are able to pinpoint the real price action.

Here are the main advantages when using the Parabolic SAR:

(1) Can be used by all trading styles and in all timeframes (from tick price charts and up to monthly charts)

(2) Easy to use signaling system, even for beginners

(3) Parabolic SAR can generate tens of trading signals on a daily basis

(4) Can be used to analyze any financial market and any asset (stocks, indices currencies, commodities)

(5) Determines also the take-profit and stop-loss levels

Read more: Parabolic SAR for Forex Traders

Ichimoku Kinko Hyo (一目均衡表) Indicator

The Ichimoku Kinko Hyo is a popular trading indicator that was created by a Japanese journalist, Goichi Hosoda, and his team.

The system was released in late 1960 after more than 20 years of development and testing. Today Ichimoku Kinko Hyo is considered on of the top Forex trading indicators which can also be applied to equities, futures and other types of financial instruments. Ichimoku Kinko Hyo means 'Quick Equilibrium Chart' and it is able to provide traders a complete picture of the current market conditions, in just a glance. Ichimoku Kinko Hyo is a relatively complex tool but it offers some unique trading characteristics, for example identifying instantly strong trends and reversals.

How Ichimoku Kinko Hyo Works?

The Ichimoku indicator is based on the combination of different moving averages aiming to identify the master trend. The lines of moving averages incurred in an Ichimoku chart are calculated and plotted using the ½ point of highs and lows as it is described below.

Read more: Ichimoku Kinko Hyo