Learning More Technical Indicators

June 16, 2009

by Ahmad Hassam

Moving Average Convergence Divergence (MACD pronounced Mac Dee) is the difference between the 26 day and 12 day exponential moving averages. A 9 day exponential moving average called the signal line or a trigger line is plotted on top of MACD to show buy/sell opportunities.

There are three ways to use MACD: Crossover, overbought/oversold conditions and divergences. MACD proves most effective in wide swinging markets. The basic rule is to sell when MACD falls below the signal line. Similarly, it is a buy signal when MACD rises above the signal line and cuts it from below.

When the shorter moving average pulls away from the longer moving average, it is likely the price is overextended itself. This indicates, it will comeback to the realistic levels soon. MACD is also very useful tool in telling whether the market is overbought or oversold.

An indication that an end to the current trend may occur soon is when MACD diverges from the currency pair. A bullish divergence occurs when the MACD is making new highs but the currency price fails to reach those highs and a bearish divergence occurs when MACD is making new lows and the currency price fails to reach those lows.

Momentum is an oscillator that indicates the rate of price change. This oscillator is the net difference between the currency closing price and the oldest closing price from the predetermined period. The shorter the number of days included in the calculations, the more responsive the momentum oscillator will be to the short term price fluctuations. The signal is triggered when the oscillator crosses the zero line.

The Relative Strength Index (RSI) indicates a markets current strength or weaknesses depending on where the prices close during a given period. RSI is plotted on a scale of 01-100. A buy signal is triggered when RSI moves up from the lower band usually set at 30. A sell signal is triggered when RSI moves down from the upper band and comes down below 70.

Rate of Change (ROC) is another version of momentum oscillator sometimes used. Instead of subtracting the oldest closing price from the current closing price, the ROC formula divides the current closing price with the oldest closing price.

One of the most popular indictors is the Volume Indicator. A movement accompanied by an increasing volume is more likely to continue in strength than a movement accompanied with decreasing volume which is likely to fade away. It is used to show the strength of an up or down movement.

Many traders use volume indicator as their only technical indicator in trading. Other traders use it in conjunction with price charts and fundamental analysis like economic news and geopolitical news. It gives entry and exit signals and helps in overall trading. The Volume Indicator is a great source of confirmation. You should learn to use these technical indicators. You should become comfortable in using them. Every trader has his/her own favorite technical indicators. Use them to discern trends on different currency pairs and time intervals.

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Develop your own Forex Trading System. Read about L.M.T Forex Formula.