There are three different types of analysis in forex trading: fundamental, technical, and sentiment. In order to get the best trading experience possible and maximize your profits, you should use all three of these analysis types.
However fundamental and sentiment analysis can be quite easy to grasp, technical analysis is where many traders go wrong. New traders will either have the tendency to use too many indicators, or not use any at all. Throughout this article we'll be instructing you on the three best indicators for a beginner and how you can implement these into your trading.
The Stochastic is a good indicator that helps us determine where price is going next – it outlines the overbought and oversold conditions in the market and is scaled from 0 to 100, a reading over 80 indicates overbought and a reading below 20 indicates oversold.
In order to utilize this indicator to its full potential, you would look for the overbought and oversold conditions in the market – if the scale is showing overbought then you know that this is a good time to go short as price is most likely to go down.
Relative Strength Index (RSI) is a simple indicator that can be used to determine whether a currency pair is overbought or oversold – just like the Stochastic mentioned above. The reading is scaled from 0 to 100, in general terms a reading over 70 would indicate that price is overbought whilst a reading under 30 would indicate that the price is oversold.
This might seem very similar to the stochastic indicator and in a way it is, it generally just acts as an extra confirmation to see whether price is overbought or oversold. Since they both have different configurations however, they will each show up different results and you can favour this into your analysis.
Moving averages are perhaps the most simple technical indicator that you can use, they basically smooth out the price action and help you understand the trend easier i.e. up-trend, down-trend, or ranging. You can configure the settings of this indicator to change the smoothness of the line – a smoother line will be slower to react to the price action, but will be more stable.
There are two different types of moving averages: simple moving averages (SMA), and exponential moving average (EMA). SMAs are much smoother but EMAs put more emphasis on the current price action, meaning that it is a more updated indicator.
For this indicator you will want to experiment a bit, the settings will have to be changed for each currency pair in order to adapt to the volatility and price action of each market.
Now that you know all about the three indicators outlined above, all you need to know now is how exactly you can implement them into your trading. Firstly, it should be noted that you will probably need an extra platform solely for your technical analysis – MetaTrader is the industry standard.
Once you download MetaTrader, all you need to do is add the indicators to your chart and configure the settings. There will be some guides available to help you do this.
You should also remember that it would be bad practice to focus solely on these indicators. Even though they can help you analyze the market, they aren't always perfect – no technical indicator is – you should only use them to confirm your trade, do not rely on them solely.