By identifying forex signals during trading, you can obtain trade recommendations. These help you understand which currency pair to choose, whether to go for a buy action or sell action, and the right time to enter or exit the financial market. Some traders follow these signals completely, while others use these for deeper analysis and decide their next move. Technical indicators play a major role in generating these signals as well. Here are the basic technical indicators that you can use to generate the best forex signals –
- Support and Resistance
The simplest and most useful concept in technical analysis is support and resistance. This is the idea that price will tend to bounce off the same level more than once. There are four main explanations for the existence of support and resistance, such as large limit orders, self-fulfilling prophecy, option-related, and round number bias.
- Simple and Exponential Moving Averages
A simple moving average (SMA) is the average price of a security over the past certain number of periods. As time passes, the older prices fall out of the average, to be replaced by newer prices. The shorter the period used for the moving average, the more volatile it will be and the more closely it will track the price of the security itself. The length of the SMA you use depends on your trading time horizon. You can use moving averages on daily or intraday charts. An exponential moving average (EMA) is similar to an SMA but it puts more weight on recent data versus older data, so the EMA turns up and down faster.
Momentum indicators are similar to overbought/oversold indicators as they all generally try to identify moments when price has extended too far, too fast in one direction and could be ready to turn back around. In other words, they attempt to identify overshoots. There is a point where price becomes overstretched and is primed to snap back. While often dangerous to trade in isolation, these indicators can help you scale in and out of positions at better levels than a purely naive or random approach.
Ichimoku charts are a Japanese method of plotting price and time. They are most commonly used when trading USDJPY and JPY crosses. The concept is similar to a moving average crossover but it uses a cloud formation, which attempts to define the current and future trend. The Japanese word ichimoku means “one look.” That is the special characteristic of the ichimoku: It gives you a clear view of the trend with one look and provides firm entry and exit points.
- Fibonacci numbers
The Fibonacci numbers are the integers in the sequence 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on, where each number is the sum of the two previous numbers. The popular Fibonacci ratios in finance are 23.6%, 38.2%, 50%, 61.8%, 76.4%, and 100%. The numbers are used to estimate possible retracements. For example, if a stock falls from $100 to $50, the 50% retracement would be $75 as that is the point where price recoups half its fall. The 61.8% retracement would be ($100 – $50) x 0.618 + $50, which is $80.90. In other words, if the stock falls from $100 to $50, the 61.8% retracement would be $80.90. Bearish traders who missed the first selloff would look to sell around $80.90 with a stop above the $100 level.
Once you learn to use technical indicators to generate forex signals and combine it with fundamental analysis, you can come up with unique trade ideas.