In part 1, we looked at moving averages and the importance of identifying support and resistance levels in our forex trading. Let’s continue now with some more basic key concepts.
I bet you never thought you’d use candle sticks again – outside of a relaxing in the bath scenario. That’s about to change, big time! Almost all forex traders use something called “Japanese Candlesticks” in their trading.
Japanese candlesticks are used to mark price action – each candlestick represents a timeframe. So, if we are trading on an hourly chart for example, each candlestick represents an hour on that chart. What’s so great about that? Well, candlesticks pack in a lot of key information within that bar. You can tell what the price started at, and where it finished. You can tell the highest price within that hour, and the lowest too. When you’re trading, and you know how to read candlesticks it really does help you to isolate any emerging trend – and more importantly, a collection of candle sticks can reveal even more about any price patterns that may be forming. A really important tool to learn about and use with your forex trading.
So, what about some of the other most commonly used forex trading indicators? Here are the ones you’ll probably come over while learning about forex trading:
MACD – This stands for “Moving Average Convergence Divergence” – now don’t panic, the name is about the hardest part in using this indicator. It’s a wonderful little tool that can identify an imminent price reversal with freakish accuracy. In a nutshell, when the price appears to be making higher highs, and the MACD indicators seems to be doing the opposite, well get ready to enter the trade – there’s a price reversal on the cards.
Like all indicators, MACD cannot and should not be used in isolation. It must be combined with a couple of your favourite indicators , and when all are saying “yo, this thing is gonna turn” – that’s when you know the probability of a winning trade is very high.
Stochastics – Don’t you love supply and demand economics? Try as we might, no one can manipulate the ultimate golden rule – when there’s too much supply, the price will move down. And when there’s too much demand, the price will move up.
Now, imagine an indicator that shows you overbought and oversold currencies! Well, that’s exactly what the stochastics do, and by no coincidence it’s also why it’s a hugely popular indicator with many profitable forex traders.
RSI – A similar indicator to the stochastics is the RSI, or Relative Strength Index – this also identifies overbought and oversold areas of currencies, but displays the information in a slightly different way.
These are just a few of the most popular, and widely used indicators on a vast, diner style menu of trading indicators available to us. Typically, new traders will test and try different indicators, and different combinations and settle on a few favourites.
And, before you know it, one day you’ll pull up your screen and it will look pretty much the same as the one that terrified you when you first saw it…only this time round, you can only see pattern formations that have the potential to make you money.