Over the past couple of weeks, stocks took a blow while some commodities reached unprecedented highs, raising concerns about the path forward for the global economy. In such an environment, where fundamentals can change from one day to another, traders continue to rely on technical signals.
However, most of them are confused and tend to overcomplicate things. If you want to keep forex trading simple while using tested and trusted indicators, here are 4 potential picks that can make a difference in your strategy.
Relative Strength Index (RSI)
Well-known as an oscillator that can show overbought or oversold conditions in the market, RSI is an indicator built into most of the platforms available out there. Prices don’t move up or down in a straight line and using RSI, it’s possible to spot when those turning points might occur.
Professionals use this indicator, especially on the higher time frames, because that way they can have a bigger picture over the overall trend. Although it might be used for smaller periods as well, RSI displays many false signals and could stay overbought/oversold for an extended time, delaying the turn.
A trend-following momentum indicator, MACD shows the relationship between two moving averages (26 EMA and 12 EMA), while a nine-day EMA is plotted as a “signal line”. There are several ways to use this indicator, but the most common are crossovers, divergences, and rapid rise/fall.
Currencies like the Euro have been active as of late and that means it’s possible to use MACD even on smaller timeframes. However, you should be aware that it can produce “false signals”, especially when the market is trading in a range or consolidating. Also, moving averages are lagging indicators so waiting for the cross to occur on the MACD might mean entering the market at a sub-optimal placement.
Another indicator designed to spot overbought/oversold conditions is the Bollinger Band. Compared to RSI, it includes two standard deviations (positive and negative) and a simple moving average (the line in the middle).
What makes this indicator different is that the bands expand or compress, depending on rising/falling volatility in the currency pair you are watching. Traders can use it to buy/sell on when the price hits either band, but at the same time, gain a deeper understanding of how volatile the asset is.
Current market conditions are abnormal, and currencies such as as the Russian Ruble or Turkish Lira, are displaying wild swings. Regular indicators might not do the job in this case, so traders should consider using the Elliott Wave.
Some platforms offer scripts or EAs that enable traders to count the waves and figure out in what type of environment they are trading. Based on Elliott Wave principles, one can spot corrective moves and anticipate big market swings, without overcrowding the charts with many indicators.
There are numerous resources available online on topics dealing with how to apply the Elliott Wave for forex trading. Also, you can find tutorials and videos posted by professional traders on YouTube, showing just how they view the wave count.