The list below
highlights some key indicators that can be woven into
your Forex trading style, It is important to acknowledge
the probability that no indicator on its own is a good
enough reason for entering or exiting a trade, it is
crucial to get a combination factor when considering a
trade.

Moving Averages

A “Moving Average” is a
technical indicator that shows the average value of a
particular currency pair over a previously determined
period of time. This means, for example, that prices may
be averaged over 20 or 50 days, or 10 and 50 min
depending on the time frame that is more convenient for
you at the moment of your trading activity.

Moving Averages are an
averaged quantity and can bee seen as a smoothed
representation of the market activity at the moment and
it’s an indicator of the major trend influencing the
market behavior.

This smoothing effect
of the Moving Average is very helpful when the trader is
looking for getting rid of the “noise” in the price
fluctuations of the currency pair he is trading at the
moment and a more precise emphasis in the trend
direction is required.

The mechanics of how
Moving Averages can tell a Forex trader where the Forex
market is moving (up or down) is by considering two
different time frame Moving Averages and then plotting
them on a Forex chart. It is very important that one of
these MA is over a shorter time period than the other
one; let’s say one will be over a 15 days period and the
other over a 50 days period.

Once you have plotted
the two Moving Averages with your charting software you
will notice points of crossover where the shorter time
period MA will cross above the longer time period MA
indicating an upward trend in the market, or if the
crossing is below the longer period MA that will be an
indication of a down trend in the Forex market.

So by using this simple
concept of the Moving Averages you can start
understanding the basics of confirming trends when
checking your Forex charts during your particular
trading hours.

Bollinger Bands

Bollinger bands are
simply volatility bands drawn either side of a moving
average.

You calculate Bollinger
bands using the standard deviation of price over the
same period as moving averages the mean price, then the
volatility bands are plotted above and below the moving
average.

Moving averages are
used to identify the underlying trend of currencies and
Bollinger bands take this one step further by:

Combining the moving
average of the currency with the volatility of the
individual market (or the standard deviation) – this
then creates a trading envelope – with a middle mean
price (moving average and 2 x bands (expanding or
contracting) either side that reflect volatility or
standard deviation.

As prices move away
from the longer-term average, the standard deviation
rises - and thus the bands will fluctuate in varying
amounts, away from the average.

Relative Strength Index
(RSI)

The RSI (Relative
Strength Index) is a popular technical analysis
oscillator. There are numerous uses of the RSI,
including objective buy and sell signals and bullish and
bearish divergences. The RSI, as its name implies
measures the relative strength of price currently
compared to the past: the formula usually uses a
14-period input. As an oscillator, above 70 is
considered overbought and below 30 is considered
oversold.

Some traders use the
RSI for objective buy and sell signals. They usually
interpret a buy signal as occurring when the RSI crosses
back above 30 after spending time in the oversold area.
A sell signal is declared when the RSI moves back below
70 after spending a period of time in the overbought
region. The RSI as well as buy and sell signals is
visually depicted in the link to the chart Relative
Strength Index

Another popular use of
the Relative Strength Index for stock, futures, or
currency traders is bullish and bearish divergences. At
times when price is increasing, but the RSI is falling
or not moving, this can signal trouble. This bearish
divergence can suggest that a trader exit his/her
position.

In contrast, when price
is falling, but the RSI is failing to go lower, but is
maintaining steady or rising, a bullish divergence has
occurred. A trader might exit any short positions.

Moving Average
Convergence Divergence (MACD)

MACD (Moving Average
Convergence Divergence) comes as a standard Forex signal
on all the main charting packages. Some show MACD by
itself with two lines, one a combination of a 12 and 26
Exponential Moving Average, and the other line based on
a 9 Exponential Moving Average.

Some charting packages
also include what is called a Histogram in the same
charting area as MACD. The histogram merely represents
in a different way what is happening between the two
MACD lines as to market momentum. The wider the gap
between the MACD lines, the higher or lower the height
of the histogram bars.

To identify MACD
divergence, simply draw a line across the highs if MACD
is above the zero line, or draw a line across the lows
if MACD is below the zero line.

Now go to the price
action section of the chart, the candlesticks, and draw
a line across the highs directly above where the line is
drawn on the MACD highs, or draw a line across price
lows directly above where the line is drawn on MACD
lows.

If they are going in
opposite directions you have MACD divergence. In other
words, when MACD is making lower highs and lower lows
but price is making higher highs and higher lows, this
negative MACD divergence forms a Forex signal indicating
price could well start to drop.

If MACD is making
higher highs and higher lows but price is making lower
highs and lower lows, this positive MACD divergence
forms a Forex signal indicating price could well start
to rise.