In the world of trading, there are two most commonly used strategies. These are Fundamental and Technical Analysis.
Fundamental analysis evaluates a particular security by examining quantitative and qualitative factors that includes economic and financial aspects.
Technical analysis also evaluates a particular security by forecasting the direction of its prices, using the study of past market data primarily price and volume.
In this article, I will show you three of the most used indicators in technical analysis – SMA, MACD and RSI
Simple Moving Average or SMA
The simple moving average is the most popular technical analysis indicator used by traders. It is the average price or statistically speaking, the mean.
It can give you a trade idea with few days of data; and you can enter the trade when the price is moving within the range of this average and can exit the trade, once it starts moving out of this average.
When the price is in an uptrend, the moving average is also in an uptrend. When the moving average has been tested by price and price has bounced off the moving average a few times, then the moving average serves as the support. In this case, a trader might buy on the next pullbacks to the simple moving average.
In contrast, during times when price is in a downtrend, the moving average is also in a downtrend. When the price tests the moving average and is rejected a few consecutive times, then the moving average is the resistance. In this case, a trader might sell on the next rally up to the simple moving average.
For example, if the price of a particular security, say a stock, for the last 5 days were 26, 25, 28, 29, and 24. The average price would be 26.4.
If the price is in an uptrend, then you should only buy when price closes above the price 26.4. In this case, 26.4 is your support.
However, if the price in a downtrend, then you should sell when the price closes below 26.4. In this case, 26.4 is your resistance.
Moving Average Convergence Divergence or MACD
The MACD indicator is a collection of three time series calculated from historical price data, most often the closing price. These three series are: the MACD series proper, the Signal Line, and the “divergence” series which is the difference between the two, represented by a histogram or bar graph.
The MACD series is the difference between a “fast” (short period) exponential moving average (EMA), and a “slow” (longer period) EMA of the price series. The average series is an EMA of the MACD series itself.
Now, you don’t have to clearly understand the technical aspects above. What you just need to know is trend direction of both Signal Line and MACD series and when they cross each other.
If the trend is uptrend, you should buy when the MACD series crosses the Signal Line. If the trend is a downtrend, you should sell when the MACD series crosses the Signal Line. A clear illustration can be seen below from OnlineTradingConcepts.com
Relative Strength Index or RSI
Relative Strength Indicator is a momentum indicator which helps to identify if the security is oversold or overbought and when is a reversal most predictable. It helps in making decisions based on the “buy low, sell high” philosophy.
The RSI provides signals that tell investors to buy when the security is oversold and to sell when it is overbought. The oversold line is at 30 whereas the overbought line is at 70.
There are more indicators used in technical analysis. This can be used in any security that is tradable be it stocks, FOREX, or cryptocurrencies.
For FOREX, there are forex trading platforms like DailyInvestNews.com that will provide you information on how to trade forex, trading reviews, and the information about best- rated brokers, along with all the important information related to the market movements on daily, weekly and monthly basis.