Foreign Exchange Trading

Foreign Exchange Trading - Techniques and Indicators for Predicting Trends

So you have become involved in the exciting world of foreign exchange trading, or Forex trading. But perhaps at the moment it doesn't seem so exciting! Maybe you are finding it hard to cope with all the technical jargon and all the complicated stuff that it seems you have to learn.

Yes, it does all appear a bit daunting at first. But even if you aren't technical, it's well worth getting your head round it all, as foreign exchange trading can be so incredibly rewarding.

One of the things you need to learn in foreign exchange trading is how to predict market trends. That is, predicting the major components - the direction, the level and the timing -- of each trend. There are a number of techniques and indicators that can be used in doing this.

• Moving averages Moving averages are used to emphasize the direction of a trend. A moving average indicates the average price at two given points in time, over a defined period of time intervals. So when the price falls below its moving average, it's a signal to sell, and when it rises above its moving average, it's a signal to buy. There are several kinds of moving average, including simple, weighted and exponential. The exponential moving average is the most often chosen as it takes into account both the most recent data, and the entire time period.
• Moving average convergence/divergence (MACD) - a more detailed way of using exponential moving averages to detect price swings. This technique plots the difference between a 26-day and a 12-day exponential moving average. It takes a 9-day moving average as a trigger line, so that below this would be a "sell" signal and above this would be a "buy" signal. The MACD is often used in conjunction with other indicators such as the RSI.
• Relative Strength Index (RSI). This compares recent gains with recent losses to detect whether the market is overbought or oversold. The higher the number - i.e. 70 or more on a scale of 1-100 - the more overbought the market is, and the lower the number - 30 or less on a scale of 1-100 - the more oversold it is. The RSI is what is called a "leading" indicator - that is, it enables you to see what the market is about to do, and act accordingly.
• Bollinger Bands These are plots on a graph, plotted two standard deviations above and below a simple moving average. The principle is that the spacing between them varies according to the volatility of the market. So when the markets become more volatile, the distance between the bands widens, and when they become less volatile, the spacing narrows. The closer prices move to the upper band, the more overbought the market is - indicating "sell" - and the closer they move to the lower band, the more oversold the market is, indicating a "buy" signal.

These are by no means all the indicators used in foreign exchange trading, but they are the main ones. You will find that people with a consistent record of success in foreign exchange trading use three or four indicators. If all of these point in one direction, it is a clear signal to get in on a trade. If the signals aren't clear, or if you're in any doubt - don't take the risk!

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