Learn Forex Trading Part 3 -Technical Indicators

Learning Forex trading online will greatly improve your odds for success. So I congratulate you for continuing your forex education.

Technical Indicators:

In my last post :Learn Forex Trading part 2 I gave you a simple system that I use to trade everyday, mentioning just two technical indicators that I use on my charts. Moving Average and Parabolic Sar. Sometimes I add MACD. You will soon see what these means.

I have a chart here to show you how my setup works. Try in on a demo account, stick the rules and you will do just fine.



Do you see where the sell and buy signals appear? The chart is a 1 hour chart of EUR/USD. This is simple if you keep it simple. You can see my moving averages and my parabolic sar on the chart. I entered the trade when price candle moved below the moving averages and the parabolic sar. My stop loss is always placed about 5 pips above the parabolic sar value. Set this up on your chart and back test it. After entering the trade, profit target was hit about 15 hours later. So with this I don't have to be glued to my computers for hours watching the trade unfold. You can do the same.

So what is a Moving Average in relation to technical analysis

Moving Averages (MA) are the most superior trend-following tools available to a market technician. There is no need to go into details on how the moving averages are calculated. Most if not all chart packages comes with this indicators. All you have to do is open your chart and insert this indicators. There are different versions of moving averages. On my chart I make use of two versions, because I have tested them and I feel comfortable with Simple Moving Average 14 and Linear Weighted Moving Average 14. Test different combinations for yourself and find a comfortable pair for yourself. I use this setting on all my charts. It works for me well. Majority of futures traders use exponential moving averages. I tried and tested it, but I was not comfortable with my settings.

There are 5 predominant Simple Moving Averages (SMA)

1. 10 SMA. is mostly used in up and down trends. Sometimes I use it especially in shorter time frames.

2. 20 SMA. is usually the dominant chart, you can use on all time frames. It is also good. But when I tested the 14MA, I loved what I saw. It is between 10 and 20 so it made sense to me and it is working really well. So for me, in place of 20 being the dominant MA on my chart, MA14 is the dominant moving average on my charts.

3. 50 SMA. Institutional traders pay close attention to this Moving Averages. So should refer to it once in a while. However, in my own test, it does no good for me.

4. 100 SMA. I look at this once in a while on a 4 hour chart, when I am planning a swing trade, that is long term trade. But still I did not find it to be of any important use to my trading style.

5. 200 SMA. I can say more than 90% of traders rely on this long term MA. It is very reliable. You can use it on daily charts and your intraday charts to note profit targets, because price almost always bounces off the 200 SMA.

The Currency Markets trend up or down and then sometimes move sideways. As you can see on my chart. When there is a trend the moving average is the most reliable tool you can have on your chart. It keeps you in the trade and helps you maximize your profit in a good trending market like what you see on my chart.

However, when it comes to sideways movement in the market, Moving Averages are useless. As you learn forex trading, here is what you should note about moving averages. When a currency pair in a strong down trend rallies back to retest a declining MA, you can go ahead and sell, provided the price does not cause the parabolic sar to move below price. Again if the pair is in a strong up trend, pull backs to retest the rising MA, without causing the parabolic sar to move above price, then you can confidently buy at that point.

Learning forex trading will take a while, but if you start practicing so far with a demo account, with what i have shared with you does far, you should be making progress already.

Linear Weighted Moving Averages

This is one of the other MA that I have on my chart. Like I said, when I tested various combinations, I found the combination of this MA and the Simple Moving Averages to be just perfect for my system. While the Simple Moving Average gives equal weight to all the values in a particular period, the Linear Weighted Moving Average assigns greater weight to the most recent data.

Continue learning forex trading and you will see your results improve as you practice and practice. You may have a good system, but if you don't learn to stick to the rules, you will become a failure statistics. If you learn your forex trading and come up with your own trading system and you are able to stick to the rules, you will do just fine.


Hope you fine this lessons helps to shorten your forex trading learning curve.
If you got to this page without first reading the first part -learn forex trading basics then go there now. Learn Forex Trading Part 1 Basics