Using Economic Indicators For Profitable Forex Market Analysis

Using Economic Indicators For Profitable Forex Market Analysis – Trend traders try to isolate and capture profits from trends. The method of trend trading tries to extract profits through the analysis of the asset in a certain direction; There are many ways to do this. Of course, no single technical indicator will punch your ticket to market riches; Along with analysis, traders should also be well versed in risk management and trading psychology. But some strategies have stood the test of time and some remain popular tools for trend traders interested in analyzing market indicators.

A moving average is a technical analysis tool that simplifies price data by creating a constantly updated average price. On a price chart, a moving average creates a single, flat line that effectively eliminates any variations due to random price fluctuations.

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An average is taken over a specific time period–10 days, 20 minutes, 30 weeks, or any time the trader chooses. For investors and long-term trend followers, the 200-day, 100-day and 50-day simple moving averages are popular choices.

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There are many ways to use a moving average. The first is to look at the angle of the moving average. If it moves horizontally for a longer period of time, the price is not trending, it is in a range. A trading range occurs when a security trades between constant high and low prices for a specific period of time.

If the moving average line is angled upwards, an uptrend is underway. However, moving averages do not make predictions about the future value of a stock; They reveal what, on average, the price does over a period of time.

Crossovers are another way to use moving averages. By plotting the 200-day and 50-day moving average on your chart, a buy signal occurs when the 50-day is above the 200-day. A sell signal occurs when the 50-day falls below the 200-day. Time frames can be changed to suit your personal trading timeframe.

When the price is above the moving average, it can also be used as a buy signal and when the price is below the moving average, it can be used as a sell signal.

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However, because price is more volatile than a moving average, as the chart above shows, this method is more prone to false signals.

Moving averages also provide support or resistance to the price. The chart below shows the 100-day moving average acting as support (ie, its price bounces off).

Moving Average Convergence Divergence (MACD) is a type of oscillator indicator. An oscillating indicator is a technical analysis indicator that fluctuates over time within a band (above and below the median; MACD fluctuates above and below zero). It is both a trend-following and a momentum indicator.

A basic MACD strategy is to see which side of zero the MACD lines are on the histogram below the chart. If the MACD lines stay above zero, the stock is likely to be in an uptrend. Conversely, if the MACD lines remain below zero for a sustained period, the trend is likely to be bearish. Using this strategy, potential buy signals occur when the MACD moves above zero and potential sell signals occur when it reaches below zero.

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Signal line crossovers can also provide additional buy and sell signals. MACD has two lines—a fast line and a slow line. A buy signal occurs when the fast line crosses through and above the slow line. A sell signal occurs when the fast line crosses through and below the slow line.

Relative strength index (RSI) is another oscillator indicator but it provides different information than MACD as its movement is between zero and 100.

One way to interpret RSIs is by viewing price as “overbought” when the indicator on the histogram is above 70—and due for a correction—while viewing price as oversold when the indicator is below 30 and due to a bounce.

In a strong uptrend, price often reaches 70 and above. For downtrends, price can stay at 30 or below for a long time. Although simple overbought and oversold levels are occasionally accurate, they may not provide the most timely signals for trend traders.

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An alternative is to buy near oversold conditions when the trend is up and place a short trade near overbought conditions in a downtrend.

For example, suppose the long-term trend of a stock is up. A buy signal occurs when the RSI moves below 50 and returns above it. Essentially, this means that a pullback in price has occurred. So once the pullback appears to be over (according to the RSI) the trader buys and the trend resumes. 50-levels are used because the RSI usually does not reach 30 in an uptrend unless it is likely.

A retreat is underway. A short-trade signal occurs when the trend is down and the RSI moves above 50.

Trendlines or moving averages help establish the direction of the trend and in which direction to take trade signals.

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Volume is a valuable indicator, and on-balance volume (OBV) takes significant volume information and compiles it into a single one-line indicator. The indicator measures cumulative buying and selling pressure by adding volume on “up” days and subtracting volume on “down” days.

Ideally, volume trends should be ascertained. A rising price should be accompanied by a rising OBV; A falling price should be accompanied by a falling OBV.

The figure below shows the shares of Netflix Inc. (NFLX) is trending higher along with OBV. Since the OBV has not fallen below its trendline, this is a good indication that the price is likely to continue trending higher even after the pullbacks.

If the OBV is rising and the price is not, it is likely that the price will start rising following the OBV in the future. If the price is rising and the OBV is flat-lining or falling, the price may be near the top. If the price continues to decline and the OBV is flat lining or rising, the price may reach a bottom.

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Indicators can facilitate price information in addition to providing trend trade signals and warnings about reversals. Indicators can be used on all time frames, and for the most part, they contain variables that can be adjusted to suit each trader’s specific preferences. Traders can combine indicator strategies–or come up with their own guidelines–so entry and exit criteria for trades are clearly established.

Learning to trade on indicators is a tricky process. If a particular indicator appeals to you, you may decide to investigate it further. More importantly, it is better to test it before using it to make live trades. And for those who have never traded actively before, it is important to know that opening a brokerage account is a necessary first step in gaining access to the stock market.

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Offers appearing in this table are from compensatory partnerships. This compensation may affect how and where listings appear. Does not include all offers available in the market. A forex trader can create a simple trading strategy to take advantage of trading opportunities using some moving averages (MAs) or associated indicators. MAs are primarily used as trend indicators and also identify support and resistance levels. The two most common MAs are the Simple Moving Average (SMA), which averages price over a given time period, and the Exponential Moving Average (EMA), which gives more weight to recent prices. Both of these form the basic structure of forex trading strategies below.

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This moving average trading strategy uses the EMA because this type of average is designed to react quickly to price changes. Here are the strategic steps.

Forex traders often use the short-term MA crossover of the long-term MA as the basis for a trading strategy. Play around with different MA lengths or time frames to see what works best for you.

Moving average envelopes are percentage-based envelopes set above and below the moving average. The type of moving average set as the basis for envelopes does not matter, so forex traders can use simple, exponential or weighted MA.

Forex traders should test different percentages, timeframes and currency pairs to understand how they can best use an envelope strategy. It is common to look at envelopes on 10- to 100-day periods and to use “bands” that are distances from the moving average between 1-10% for daily charts.

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If day trading, envelopes are often less than 1%. In the one minute chart below, the MA length is 20 and the envelopes are 0.05%. Settings, especially the percentage, may need to be changed depending on volatility. Use the settings below to align the strategy to the day’s price action.

Ideally, trade when price has a strong overall directional bias. Then, most traders only trade in that direction. If

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