Using Technical Indicators
Forex traders use price charts to help them locate the profitable market trends, while technical indicators are used to identify the strength and sustainability of the trend.
You should confirm the shift before you act, if an indicator is suggesting a reversal. That usually means that you have to wait for another period to verify the signal of the same indicator or check out another indicator. It's important to stay patient and calm, when trading forex, because it will help you to identify signals correctly and respond to them accurately.
Types of Moving Averages
The indicator which is very often used in forex is moving averages, which helps traders to confirm trades that already exist, located emerging trade and see overextended trends. The lines of this indicator are overlaid on a chart which shows the average short-term price fluctuations, and this can help you to see the long-term price trend.
Here are the three types of Moving Averages.
1. Simple Moving Average
This type of moving average weighs each price point over the particular period equally. The trader needs to specify whether the high, low, or close is used, and after that the price points will be added together and averaged, which will form a line.
2. Weighted Moving Average
Another type of moving average is called a weighted moving average, which gives more value to the newest data. It makes smoother the price curve, while also making the average more responsive to recent changes in price.
3. Exponential Moving Average
The last type of moving average is an exponential moving average. It weighs the most recent price data in a different way. An exponential moving average multiplies a percentage of the most recent price by the previous period's average price.
How To Find Best Moving Averages
It can take a bit of time, before you can identify the best combination of moving average and period of length for the currency pair you are using. The best solution will make your trend perfectly visible as it grows. When you are trying to find an optimal fit is called curve fitting.
What traders do is they usually compare a few time frames for their moving averages on a historical chart. After that, you can quite easily compare how well and how early each time frame signaled changes in the price data as they developed.
When you find a moving average that works pretty good for your currency pair, you can consider this as a line of support for long positions or resistance for short positions. If prices cross this line, that often signals a currency is reversing course.
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