Identifying a trend is the quickest route to making money through forex trading. But there is a catch: if mastery of the trend were more effortless, every forex trader would be a millionaire. What then is the secret?
New research shows that forex traders who know how to exploit strengths of RSI, MACD and BB are likely to succeed in forex trading faster than those who overload their screens with technical indicators
This article briefly explains how each of the three technical indicators works. And how you can combine their potentials. And come with a solid strategy that can magnetize yourself millions quickly. Let’s get started.
A Brief History of the 3 Technical Indicators
Technical indicators exist to tell the market trend, momentum, volume and volatility.
The trend is when the prices are likely to change owing to past data. Momentum is the rate of price change. Volume is the sales made in a period. Volatility is the rate of change drifting in a direction.
Various technical indicators can show more than one activity. For instance, RSI is both a trend and momentum indicator. Here is what each technical indicator entails.
How to Use the Indicators
Relative Strength Index is both an indicator that tells you the weaknesses and strengths of a currency pair depending on the most recent closing prices.
It displays as an oscillator ranging between 0 and 100. When the reading drops below 30, it means your target currency pair is experiencing overselling in the market. On the other hand, a reading above 70 echoes market is overbuying.
Another crucial point to take seriously is the 50 reading. It is used to show the centerline crossovers. You can use it as a reference point for identifying uptrend or downtrend.
For instance, let’s say EURUSD has been hanging below 50. Then, it starts rising above 50 and approaching 70. This signals an uptrend taking place. The market is said to be bullish or strong.
Similarly, price falls below 50 and towards 30 shows a downtrend and a bearish market. It is a weak market.
Moving Average Convergence Divergence is a technical indicator that turns the difference between two exponential moving averages (MAs) into momentum. It has three lines:
Calculating MACD lines equals subtracting the longer MA from the shorter one. The default moving average durations are 12, 26 and 9-day periods.
12-day EMA is considered the faster/shorter MA, while 26-day EMA is the longer MA. The 9-day period is the signal of the MACD line. You can calculate the values as shown below:
MACD Line = (12-day EMA – 26-day EMA)
Signal Line = 9-day EMA of MACD Line
MACD Histogram = MACD Line – Signal Line
The difference between the signal and MACD lines creates a histogram. A positive histogram occurs when the MACD line rises above the signal line. The divergence of the shorter day EMA from the longer one shows growing momentum.
On the other hand, negative histogram results when the MACD line falls below the signal line. The falling of the shorter day EMA below the longer one shows falling momentum.
Like MACD, Bollinger Bands constitute three lines: two bands up and downside of a simple moving average. The distance between the two bands forms a standard deviation.
The moving of the bands towards each other shows low volatility, whereas the widening gap echoes high volatility. The standard deviation helps you set the profit level.
How to Combine the 3 Technical Indicators
Research shows that massive jumps or drops in prices may create false buys or sell signals in RSI. Bollinger bands give false signals in a trending market.
The best remedy is to use a confluence indicator. Here, you combine the strengths of the three technical indicators.
For instance, you can realize trends using RSI and catch false signals using MACD. Likewise, you can include BB in the equation to monitor short term trades.
RSI, MACD and BB can help you control your market actions. Using them together enables you to identify the best investment and take-profit times. This propels your chance of becoming a forex trader millionaire quickly.