Forex Trading Charts

Even as a new forex trader you have probably come across forex trading charts while doing your research.  You know, those charts with graphs showing price movements and lots of numbers flashing. 

Forex trading charts are your most important tool as a trader.  They will show you a number of indicators just from looking at them.  In the beginning you may have a hard time keeping up with it, but with some practice and persistence, you’ll be reading charts and ‘candlesticks’ like a pro.

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In this article we are going to look at some common indicators that are highly useful.

Simple Moving Average (SMA)

A moving average shows you the price development over a running period. Say you have 30 periods of trading data, a normal average would only show you one number, the average of all 30 periods. A simple moving average on the other hand is adjusted so that it always includes the latest 30 periods. 

This means that you get 30 averages that you can plot on the charts showing the average price trend over that period.  If the actual price is above or below the forex simple moving average price, then that could be a sign that you should either buy or sell.

Exponential Moving Average (EMA)

The exponential moving average is similar to the simple moving average in the basic formula used, but differs on some key points.  The simple moving average assigns an equal weight to all price and the older prices are removed as new prices are added.  With the exponential moving average, the older price date is not removed but rather assigned a lower weight than more recent data, thus giving a more accurate prediction over a longer period of time.

Moving Average Convergence / Divergence (MACD)

MACD is a technical analysis indicator that shows the difference between a fast and slow exponential moving average (EMA) of closing prices.  The standard interpretation is to buy when the MACD crosses up through the signal line, or sell when it crosses down through the signal line.  A crossing of the MACD line up through zero is generally interpreted as bullish, or down through zero as bearish.

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Bollinger Bands

Next we turn to Bollinger Bands. This indicator shows up on your forex trading charts as two lines that show the liquidity and volatility of the market. It’s very similar to basic support and resistance levels.  If the lines are far apart, it means that there is a lot of buying and selling going on.  If they are close together, then that means there is not much action.  It’s normal for the price to move forcefully in one direction after such a quiet period.

Stochastics

Stochastics is a statistical tool to determine if the market is overbought or oversold.  It uses the forex moving average to see if the price is either too far above or below the moving average line.  This means it’s quite a potent buy/sell signal.

Relative Strength Index (RSI)

This is similar to the stochastics indicator in that it also signals if the market is overbought or oversold by comparing the magnitude of recent gains to recent losses.  It uses different markers though than the stochastics indicator.  RSI is scaled from 0 to 100 and typically, readings below 20 indicate oversold, while readings over 80 indicate overbought.

Parabolic Stop And Reversal (SAR)

Also abbreviated SAR, this indicator is helpful in determining if the top or bottom has been reached in a trend movement.  It’s probably the best indicator to make sure you enter the market at the bottom and sell at the top.

The signal shows a series of dots and when the market price crosses the dots, then it’s a good sign to buy.  These indicators will get you a long way towards making good trades.

There are many more indicators and custom signals, but these are quite simple to spot and highly effective. MetaTrader 4, the most popular trading platform, has good support for external software that can help you utilize the power of signals.

Make sure you sign up to receive your free copy of "Beginners Introduction to Forex Trading".  A must read for those interested in learning how to trade the forex market.

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