Evdokia Pitsillidou, Risk Associate, easyMarkets
If you are new to trading, then you might be hoping for some kind of magic that might help you determine when to make profitable trades.
Of course, entry and exit points aren’t always that easy to identify. There are, however, some very powerful technical indicators that may sometimes produce seemingly magical signals to help you get in and out of trades like a true whiz.
Stochastic oscillators are designed to help us decide when a trend might be coming to an end by identifying when a currency pair is in an overbought or oversold state.
A stochastic oscillator works similarly to a MACD indicator, which we will look at shortly, by showing two lines, one of which is faster than the other.
Using stochastic oscillator is simple enough – for example, go short when the lines cross above 80 (the market is overbought) and go long when the lines cross below 20 (the market is oversold).
Bollinger bands were developed by a man named John Bollinger with the aim of measuring market volatility.
Reading Bollinger bands is easy because when price is ranging the two lines move close together, and when a strong trend occurs you will see the lines begin to diverge.
This indicator provides solid entry and exit signals because price tends to stay within the two lines. If price hits the top line you can sell, and vice versa.
The Relative Strength Index provides another way of determining whether the market is overbought or oversold.
This is another easy indicator to read because levels over 70 signify that the market is overbought while readings of 30 or lower tend to suggest that conditions are oversold.
We can also use RSI as confirmation for identifying trends – readings over 50 suggest an uptrend while readings below 50 suggest a downtrend.
Being able to determine that the market is, say, both overbought and in a downtrend could give you a powerful entry signal for a short position.
Parabolic SAR, or Stop And Reversal, provides a great way of identifying when a trend is coming to an end.
This indicator works by placing dots on your chart to suggest when a reversal might occur.
In order to trade with the Parabolic SAR, you should simply go long when the dots are below the candles, and go short when the dots are above the candles.
As you approach a reversal point you will notice the dots getting closer to the candles, so keep an eye open for when the dots begin to appear on the opposite side.
MACD or Moving Average Convergence Divergence uses moving averages to identify when new trends are forming.
The MACD uses a slow moving average and fast moving average, so when a new trend starts you will see the lines cross over before the fast line begins to move away. In other words, the lines diverge.
You should be watching out for a crossover of the two lines as this may be your entry point.
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