The Truth About Currency Trading Signals

Monday, August 30, 2010

Forex trade signals refer to any number of different indicators that can be overlaid onto a forex pricing chart. The next step is to choose which signals you are working to identify and react to and then pick the correct indicators to place on the candlestick chart.

The normal candlestick chart uses color to show the difference between positive and negative movements. The usual colors are green for a bullish movements and red for a bearish one. The individual candlestick body denotes the starting and closing price of that individual session. The contrasting colors signify a bull or bearish session. The lines that are called shadows at either end of the body denote the high and low values of the session. On the occasions that no shadow is showing it signifies a session where the final price at the close was the highest or the lowest in the period measured by the candlestick obviously resultant on the color of the body. The more you utilize these charts the more often you will come across the chief signal patterns of which there are over 20 different types. From recognizing a pattern you must be able to interpret what it is signaling.

The candlestick chart however is only the start of the analysis and it should always be studied in conjunction with further signal indicators. These further indicators are overlaid onto the candlestick chart to offer the analyst a clear signal pattern

Bollinger Bands - This indicator provides a relative definition of a high and low. The price is high as it moves toward the upper band on the chart and it is low when it is near the lower band As an example an analyst may choose to buy when the price line is close the lower band, signaling a low price to buy into the market as it will likely move up and increase in value. An alternative strategy is to buy if the price breaks above the upper band and sell when the price falls below the lower band. It is the job of the analyst or trader to interpret these signals according to their own strategy.

An indicator which is also used extensively is the Relative Strength Index (RSI) This indicator illustrates the strength or weakness of a currency calculated on previous data located in completed sessions. A currency tends to end the session higher pointing toward a stronger market and conversely will close lower indicating a weaker market.

The Moving Average Convergence / Divergence (MACD). This indicator shows the difference between a quick and slow moving average of closing prices. When using the MACD a trader uses the MACD line to highlight trend changes. If the MACD passes over the signal or price line at any point or it crosses zero on the chart then this is a signal that the trend is reversing. Divergence of the signal and MACD also would indicate this. The interpretation is that if the MACD crosses up through the signal line it is a buy signal and it is a sell signal if the MACD crosses down through the signal line. Various other signals can be seen and they use largely the distance between the MACD and signal line and the direction of movement.

Unless you buy in a forex robot to monitor and calculate trades on your behalf you will have to get a detailed understanding of charts as well as the numerous signal indicators needed to form a profitable trading method.

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