Forex signals can be found by using technical indicators, which are chart-based technical analysis tools that predict future price performance. These indicators usually create clear signals to open or close a position so that a profitable trade can be made. Here are some of the most popular technical indicators used by currency traders that generate forex signals.
- Stochastic Oscillators: These technical indicators work by comparing a currency pair’s closing price with its price range over a particular period. The theory behind the stochastic oscillator is that prices indicate in which direction they are trending by closing near their high or low. Oscillators are also good at signaling when a currency pair is overbought or oversold, signaling that a turnaround may be imminent and creating a buy signal (if oversold) or sell signal (if overbought).
- Moving Average Crossovers: These indicators use moving averages based on different periods that are plotted below the price area of the chart, i.e. seven day and thirteen day. Forex signals are created when the seven-day moving average crosses the 13 MA; when it crosses upward, it is a buy signal and when it crosses downward, a sell signal.
- MACD: The Moving Average Convergence Divergence uses the same setup as the moving-average crossover but looks at the distance between the two moving averages to determine momentum. An MACD line is created using the distance between the two MAs and then a signal line is plotted using an exponential moving average. Forex signals are created when the MACD crosses the signal line, with a buy signal when the MACD moves above the signal line and a sell signal when the MACD moves below it.
- Relative Strength Index (RSI): This technical indicator attempts to determine when a currency pair is overbought or oversold by comparing the magnitude of recent losses to recent gains to create the RSI. The Index is plotted between 0 to 100 and when it moves above 70, it is considered overbought and it is a signal to close your position by selling it. When the RSI falls below 30, it is considered oversold, and you should buy the currency. However, price volatility resulting in surges and drops may create false sell/buy signals, and the RSI may be best used as a complement to other technical indicators.
- Bollinger Bands: This technical indicator measures the volatility of market conditions by using a simple moving average and two bands above and below it that are plotted using a standard deviation series. The top band is plus one standard deviation and the bottom band is minus one standard deviation. In addition, the daily exchange rate of the currency pair is also charted. This line is used to trigger forex signals. When the price line approaches the upper band, it is seen to signal that the currency pair is in its upper price range and you should sell. On the other hand, when the line touches the bottom band, it creates a buy signal.
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