One of the most pursued methods for generating income through forex investing comes from the incorporation of technical indicators that are found in various day-trading concepts. These investment methods can vary widely from being fundamentally or technically based but the purpose of these trading approaches are all the same, which would be to allow investors to make better educated market predictions. The aim of today’s educational article is to discuss the implementation of 6 technical indicators and how they can be used in a live investment scenario.
Establishing Your Bearings
Getting started on an accurate path will play a considerable role in determining your success as a foreign exchange day-trader. Obviously since we are discussing the basics and implementation of a few different technical indicators access to a charting solution is required. Among the most popular utilized charting solutions would be MetaTrader4, TradingView, MetaTrader 5, and FreeStockCharts. Each of these solutions are free of charge and provide the indicators that we will be further learning about below.
**For illustrative purposes, all the strategic images provided throughout this composition will reflect the FreeStockCharts charting solution.**
Applying Price Action Trading Concepts
As you will eventually gather the further on you read, all of the strategic images included will showcase the application of our technical indicators with Price Action trading approaches. Now, for those of you who believe they reflect an appropriate amount of understanding regarding price action, we do dare say that you can skip this section if you would like. However, for those of you who are unfamiliar with price action or wish to learn more about the fundamentals of price action feel free to keep on reading.
Price action, for those of you unfamiliar, is the summation of all buy and sell orders over any duration of time. What we mean by any duration of time would be that price action can be an interchangeable variable of time that can be plotted. An example of this time variance can be better understood in the image provided below.
In the case of FreeStockCharts, one can see how we can change the fluctuation of time between 1 minute all the way up to Yearly. This indicates that the price action shown on this charting solution can reflect a time period consisting of 60 seconds up to any available timeframe up to 1 year. Now, don’t get confused here, in the case of Japanese candlesticks (which is our plotting style), each candlestick will reflect a period of your selected time frame. So since our time frame is set to 15 minutes in the image above, each candlestick represents the price action of the Eur/Usd throughout its 15 minute interval.
Now, there are two main principles to remember when applying price action trading approaches, which would be the creation of support and resistance levels. However, the most common reoccurrence that takes place through price action would be the creation of support levels. Support levels are created when price is heading in a bearish (downward) direction and meets resistance. This resistance creates an “invisible” barrier in price action and is characterized by price heading back up in a bullish direction.
When applying price action trading concepts with support levels, it is imperative to recall that you will be executing sell orders. In order for an investor to receive the “green light” to execute a sell order, investors first must wait for 5 consecutive steps to occur. As you can see in the image provided below, the first 2 steps that need to occur in succession would be the creation of a support level followed closely by price heading back in an upward direction.
The third step that must occur would be that price needs to break below our support level in a downward fashion. A merge with a support level does not count, you must make sure that there is a clean break in the support level before you move onward to step 4. Step 4 is essentially the same as step 2 and is characterized by price heading back in a bullish direction above our support level. The last step that must occur would be that price needs to break below our support level yet again in a bearish movement.
Now that you have acquired a better understanding on how to apply price action with support levels, we are going to dive into how the incorporation of the following indicators below can elevate your investment portfolio to new heights. Each of the indicators below, as you will learn, have their own function and when used accurately with price action trading concepts generates consistent and powerful trading signals.
**Important Note: Only execute sell orders with price action trading approaches and the following indicators below when the candle (in step 5) closes. An additional confirmation that you can and should apply would be that once the bearish candle closes would be to verify that the proceeding candle is bearish and heading in a downward direction. This will help reinforce the signal provided and eliminate the probability of false signals.**
Procured by Gerald Appel, the MACD (Moving Average Convergence Divergence) is a technical analysis indicator. The MACD exhibits the functionality of a trend-following momentum indicator that is calculated by subtracting two exponential moving average (EMA) indicators. The data reflected by this indicator is computed by subtracting an EMA set at a period of 26 from a separate EMA set at a period of 12. The duration of time is determined by the period to which one sets the MACD.
In this instance, the period is 26 days and 12 days, respectfully. Applying this indicator to a charting solution is simple and it should already be set to its appropriate settings. One of the most effective ways to utilize the Moving Average Convergence Divergence indicator would be by applying it under the capacity as a secondary confirmation to price action put signals. As long as the MACD is reflecting a value below 0.00, we have confirmation that a bearish trend is underway which serves as an additional confirmation that price is decreasing in value.
It should be noted that price action trading concepts can be effectively applied to a multitude of different time frames. When incorporating the Moving Average Convergence Divergence indicator to is best to utilize a time frame between a period of 1 to 4 hours. If you decide to move outside these recommendations, make sure to adjust your MACD period settings in relation to your adjusted time frame.
Developed by Welles Wilder, the Relative Strength Index (RSI) indicator is a particularly powerful momentum based trading instrument. The main purpose of the RSI indicator is to help investors determine whether the asset under duress is exhibiting symptoms of being overbought or oversold. Comparing the magnitude of recent gains and losses over a changeable duration of time allows this indicator to be effectively employed on a wide number of time frames.
There are two main components to remember when applying the RSI indicator to any day-trading approach. The first being that if the RSI displays a value of 70 or higher it indicates that the asset is currently being overvalued (overbought) and more likely than not a bearish trend reversal will occur. However, if the RSI reflects a value of 30 or lower, it informs investors that the asset is currently being oversold and more likely than not a bullish reversal will occur.
Now since we are focusing on sell orders generated by support levels, we are going to be using the RSI indicator as a means to verify the sell orders generated through price action trading concepts. So as you can see in the two images above, both times a sell order was signaled the RSI reflected a value of 60 or higher. If the RSI exhibits a value below 60 then just void the signal and move onward to a separate trading set up.
Why are we focusing on the value being 60 or higher?
The reason why we want the value to reflect a value between 60 or higher would be because it confirms the notion that a bearish reversal is already underway. Using this knowledge while waiting for a sell order to be signaled through our price action trading approach serves as an additional confirmation that the price of the asset is likely to continue in a bearish fashion.
**To receive stronger trading signals when employing the RSI indicator, change the period of the RSI indicator to a value of 9 and make sure that the time frame reflected on the charting solution reflects a period of time between 15 to 30 minutes.**
The Commodity Channel Index is an oscillating indicator that allows investors to determine whether an asset is currently being overbought or oversold. The CCI indicator measures the relation between price and a moving average to determine market deviations and can be used to help investors identity new trends. When applying the CCI with price action trading concepts, we are looking for the CCI indicator to reflect a value directly above or below the 0.00 level.
As long as the CCI confirmation is met, you are able to execute a sell order. If you couple the knowledge you gather from the CCI indicator and use it as a means to confirm sell orders with price action trading approaches, you can generate some highly effective and consistent trading signals.
The Stochastic indicator is a rather unique momentum indicator that helps traders identify whether an asset is currently oversold or overbought. Investment signals are triggered when the %K line crosses through the 3 period moving average, which is noted as %D on the charting solution. When incorporating the Stochastic indicator with price action, we are looking for the stochastic indicator to reflect a value above 60.00 along with having our %K line cross our %D line in a bearish movement.
William %R Indicator
The Williams Percent Range indicator, comparable to a stochastic oscillating indicator, is also a momentum based indicator that measures oversold and overbought conditions exhibited by an asset. The application of the William %R indicator is most common when investors are applying trading approaches that anticipate market reversals. When used as a confirmation measure with price action, you must make sure that the William %R is reflecting a reading of at least -27.00 or lower in order to verify a sell order generated through price action.
If the William %R indicator is reflecting a reading higher than -27.00 then make sure you void the sell order generated through price action. The application of this indicator as a signal verification method eliminates many false signals generated and can greatly reduce the number of losing investments reflected in your day-trading portfolio.
Trend Oriented Indicators
There are a variety of different trend indicators but perhaps the most relied upon one would be moving averages. Moving averages can vary from simple, exponential or front-weighted. For ease, we are going to be applying two separate simple moving average (SMA) indicators. The first moving average is set to a period of 5 while the other is set to a period of 9. One effective implementation of these SMA indicators would be when used as an additional sell order confirmation with price action.
In order for a sell order to be verified, you must make sure that our SMA 5 line crosses with our SMA 9 line in a bearish fashion. Once this occurs you must patiently wait to ensure that step 5 of our price action put signal is fulfilled then you can execute a sell order. When applying these set SMA indicators, make sure to apply a time frame between 15 to 30 minutes on your charting solution.
Trading Approach Conclusion
Applying the technical indicators discussed above is an effective way to eliminate false trading signals generated through various trading approaches. As long as you don’t rush your set ups and ensure that you follow all of the steps recommended above then there is no reason why you cannot reap the rewards of some highly probable forex signals. Make sure you apply strict money management when day-trading the foreign exchange markets and always ask questions if you are unsure about any particular trading situation.