Trading simplied

Average True Range, MACD, Relative Strength Index, Stochastic. It sounds more like parts of the washing machine than anything Forex related. But don't judge the book by its cover. They're not as complicated as they may seem.

Below, we will discuss the role of trading indicators in the financial markets and, in particular, introduce seven of the most popular technical indicators and explain how they can help your trading in 2021! Remember, if your indicators generate signals that don't translate into profit over time, then they're simply not the way to go!

Simple Moving averages can be calculated by taking a certain number of closing prices, adding them together and dividing them by the total number of closing prices used. For instance, if you wanted to calculate the SMA for a five-day period, you would use the closing prices of the last five days and then divide it by five.

So if the last closing prices were: 80, 81, 81, 82 and 83, you would add these together and divide it by five, resulting in an average of 81.4. Afterwards, each time a new price becomes available, the average "moves".

In our case, let's say the next number in the sequence would be 82, the oldest rate (80) would be dropped and the new average would equal 81.8.

The longer your chosen SMA period, the slower it will react to the price movement. The shorter your chosen SMA period, the faster it will react to the price movement.

As a result, compared to SMA, EMAs are more responsive to changes and represent recent price action more accurately. So if we used the same example as above and we wanted to calculate the EMA for a five-day period, you would put more weight on the prices of the most recent (day 3, 4 & 5) and less weight on day 1 and 2.

The formula to calculate the EMA is rather complex and goes like this: EMA = (Close - previous EMA) x (2 / n + 1) + previous EMA

In comparison to SMA, traders consider the EMA to be more accurate of the current market situation as it is less responsive and therefore affected by a larger number of data points.

It is designed to measure the characteristics of a trend which include its direction, magnitude, and rate of change.

The MACD indicator is displayed on a forex chart as two lines MACD and signal line, and one histogram (bars). It fluctuates above and below a centerline (zero line) as the moving averages converge, cross and diverge.

So if the distance between EMAs gets bigger, the histogram rises. It is also called divergence. If the distance between EMAs gets closer, the histogram reduces. It is also called convergence.

When the MACD crosses above the signal line, this signals an emerging uptrend. Forex traders use this as an indication to buy. When the MACD falls below the signal line, this signals an emerging downtrend. Traders use this as an indication to sell.

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Average True Range can be interpreted in the following way:

- The higher the value of the indicator, the more likely it is that the trend will change.
- The lower the value of the indicator, the weaker the trend is and the less likely it is that the trend will change.

The stochastic indicator works on the theory that the momentum of a price changes before the price actually changes its direction. As a result, forex traders use the Stochastic oscillator to predict trend reversals.

The oscillator works on the following theory:

- In an uptrend, prices remain equal or higher than the previous closing price.
- In a downtrend, prices remain equal or lower than the previous closing price.

- When the Stochastics are more than 80, this indicates that the market is overbought.
- When the Stochastics are less than 20, this indicates that the market is oversold.

It measures the rate of change in prices as opposed to the actual price changes themselves.

Momentum indicator can be interpreted in the followin

- If the most recent price is higher than the past price, this means that the MI is positive.
- If the most recent price is lower than the past price, this means that the MI is negative.
- If a momentum value is more than zero, this indicates that the price is in an uptrend.
- If a momentum value is less than zero, this indicates that the price is in a downtrend.

It does this by keeping track of recent price gains and losses and compares them to the current price.

The Relative Strength Index is displayed as an oscillator and can range anywhere from 0 to 100.

Many traders believe that an asset at around the 70 level is in overbought territory, whilst an asset at around the 30 level is oversold.

If price hits or comes close to one of these extremes (0 or 100), this typically means that a reversal is about to take place.

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