Three Tools All Traders Should Know

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Three Tools All Traders Should Know

Believe it or not most of binary options trading is based on technical analysis. Technical analysis is the study and measure of historial price action of a financial product in order to make a prediction about its future performance. All the articles and all the strategies about trading binary options touch on technical analysis if not talk about it in its entirety. Yes, yes, fundamentals are important and have a big impact on our trading but it is the technicals that are used for pinpointing entries and determining expiry. The time frames used by the average binary trader are just to short for fundamentals to drive the trades. Increasing expectations for corporate profits may move the market over the course of weeks and months but it is the day to day shifting of the markets that we as binary options traders are capitalizing on.

The thing that I love about technical analysis is that you can use it by itself to trade without thought to the fundamentals. The basic premise of TA is that all things are known by the market and that knowledge is represented in the charts. If something is not known to the market it soon will be and that knowledge will then be discounted by the market. This means that all the information available to any trader is represented by price action and if you are good at reading price action you don’t have to worry about the fundamentals. If of course you believe in TA the way I do. It’s hard not to when the results of my analysis proves correct time and time again. So, how do you do TA? It’s actually very easy but can also be quite complex so for this article I will be sticking with some of the basic tools and techniques.

Three Basic Tools All Traders Should Know

Support and Resistance – Support and Resistance are terms that describe areas where prices quit falling or quit rising for a duration of time. Support because as prices fall they become supported by the market; Resistance because as prices rise the market begins to resist those higher prices. One way to think of it is that these are places where the market wants to buy(support) or sell(resistance). These areas are usually denoted by areas of price congestion on a chart or are price levels the market has been unable to move beyond in the past. For the technical analyst these areas are important because once they provide support or resistance once they will likely do so again. In order to use these in your analysis simply draw horizontal lines at any place on your chart that looks like a likely place. This could be at the most recent peak or trough, connecting peaks or troughs of equal height, the top or bottom of a gap in prices or a congestion band as mentioned before. Look at the chart below, I have marked several areas where possible support and resistance may be found. You can see that both the resistance and support lines provided entry points for trading.

Trend Lines – Trend lines are very similar to support and resistance lines but they are not horizontal. Trend lines are diagonal lines connecting series of higher and lower peaks. These lines are intended to measure the direction of the market over time and denotes a gradually increasing(or decreasing) price level at which the market wants to buy. An identifiable trend means that it is more likely for prices to move in the direction of the trend than against it. One of the oldest sayings among traders is “the trend is your friend, trade with your friend”. Anytime that prices move away from the trend line and then back to it is a potential entry for binary options traders. Look at the chart below; after the down trend was set by the first lower peak a continued down trend ensued. Any trend following signal can be taken until the trend is broken. In this case a 30 bar EMA was used to produce 10 or more signals in the span of a week.

Oscillators – Oscillators are a very broad category of technical analysis tool but one in which they all share some basic characteristics. For one, all oscillators fluctuate across a central line and/or between two extremes. For another, all oscillators can be used to identify three different signals; trend following signals, potential reversals and to confirm support/resistance. Some basic oscillators include RSI, Stochastic, momentum indicator and the Traders Index. Each is based on a different mathematical equation but all are displayed the same way; a wavy line that moves over and under a central signal line or between two extremes which are in turn used as signal lines. What I have noticed over the years is that most oscillators will also produce similar looking signals, some are easier to read, some come sooner than others. The basic signal an oscillator gives is the crossover. Whenever the oscillator line crosses over its signal line it is giving off a signal. These signals can be either trend following or not so caution is needed when trading solely from an oscillator. Look at the example below. I have a stack of oscillators including MACD, TRIX and Stochastic. Notice how similar the wave patterns are, stochastic seems to be leading the other two which may or may not be good. If it is producing winning signals then yes, if it is producing a lot of false signals then no. The important thing with oscillators is to pick one that you can read comfortably and use to get good signals.

3 stock market behaviors all traders should be aware of

In order to make big profits as an investor, you must have knowledge of the market and how it works. No matter if you are a pattern day trader or you’re in it for the long-term and want to make some growth investments, you must have a cash reserve. If you’re going to be successful at trading you need to know when to let go of your stock. Using trailing stops will make it easier to exit trades.

The stock market has always been a profitable place for the average trader. And thanks to platforms like Robinhood, Etrade and Ameritrade making it easier than ever to start trading from the comfort of your mobile device, it’s important to know the many different trading behaviors and account requirements that might be in place.

For example, did you know that you can buy and sell stocks with the amount of funds in your account, but that you also need to let the funds settle before buying again? And for some accounts, if you have a $25,000 minimum balance, you can then request a margin account that allows you to get around this rule.

With all of that being said, those who want to make big profits must have knowledge of the market and how it works. Whether you’re a pattern day trader who is looking to up your stakes or you’re in it for the long-term and want to make some growth investments, the following three tips and buying habits will help you to make smart decisions.

You must have a cash reserve

When investing in the market, there are plenty of emotions that come into play if you are day trading or constantly looking over your 401k portfolio. All too often, most people let fear take over in a downtrend and sell their stocks with the hope of minimizing their losses. Cash is king in this situation and those that want to buy great stocks at a discount are the real winners. In the financial market, no matter how many times it has crashed, it has never failed to re-stabilize and reach a new high. Let that be your motivation for having a healthy cash reserve at your disposal.

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Buy when there’s ‘Blood on The Streets’

Do you remember the crash in 2008? Banks went out of business. Real estate tanked. People sold what they had, thus taking huge losses. Everyone said the market would never recover and banks would never regain the trust they once had. Do you know what the people with cash reserves did? Real estate, stocks, and bonds…those with cash reserves went against everything the experts said and bought everything they could. They bought when there was blood on the streets with the peace of mind that the panic would settle and the market would re-stabilize.

And as an added bonus, Warren Buffet once said the following about the stock market and investing. “The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.” Be sure to keep this in mind whenever investing your money and want to make a quick decision on your financial future.

You can’t lose your money taking profits

If you’re going to be successful at trading, you need to know when to let go of your stock. Most investors fail at this and panic when the price goes down or they hold on for too long at the top and sell at a loss when there’s a correction. When trading, no matter how good you think you are, you are going to miss profits. That’s just a fact of riding the stock market. And you might be thinking that this isn’t a secret. It sounds more like common sense, right? It is, but the truth is that you’ll never lose money as long as you’re taking profits.

Using trailing stops will make it easier to exit trades at a profit/loss that you’re satisfied with. What’s a trailing stop? It’s a stop order that can be set at a specific dollar amount or percentage above/below the current price.

For example, you buy stock ‘A’ for $100. You don’t want to lose more than 5% of that amount but you also want to take advantage of any increases in price. If you set your stop at 5% and the market moves downwards, the stop will trigger when ‘A’ hits $95 and you won’t lose any more money. But, if the stock goes up and hits $120, the trigger price will move with it and will automatically exit the trade for you if the price falls below $114. This will allow you to maximize your profits whilst minimizing the risk factor.

How to win at the market and invest wisely

At the end of the day, way too many people think they have what it takes to win at trading on their own–but ultimately go on to lose a lot of money. If you are going to invest with your funds and financial future, make sure you start small and also put in the time and effort to understand what you are getting into.

Be sure to read through each of the recommendations and different trading methods above and see which ones apply best to you. As always, trade with your head and not over it!

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

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Top Forex technical indicators all traders should know

Analysing the Forex market can be tough for traders who are new to the market or who don’t have enough trading experience. Most beginners start by applying too many technical indicators to their charts, which usually leads to costly trading mistakes. In the end, those traders dismiss technical indicators as a viable tool to analyse the market, but the truth is that they can generate successful trading signals if you know how to use and interpret them correctly. That’s why we’ll cover the most important Forex technical indicators in this article, and show you how to read them to find great trading opportunities.

Understanding Forex indicators

Forex indicators are computer scripts that execute directly inside your trading platform, and usually plot lines or other graphical objects on your price chart. They perform mathematical algorithms on historical price data to forecast where the price might go in the future. Since technical indicators are based on historical prices, all of them tend to lag a little bit, which makes it even more important to carefully interpret their values before placing a trade.

In general, Forex technical indicators can be grouped into:

  1. Trend-following indicators: These indicators are used to determine the overall trend of a currency pair. Trends can be either upwards or downwards, and trend indicators change their value based on the strength of the underlying trend. Examples of trend-following indicators are moving averages (both simple and exponential), MACD (Moving Average Convergence Divergence), Parabolic SAR, and the ADX (Average Directional Movement Index), to name a few. Out of these, the best trend indicator in Forex depends on your trading style and strategy, so you might want to try a few of them out first.
  2. Momentum indicators: Forex market indicators that follow the speed of a price change during a certain period of time are called momentum indicators. Momentum indicators are Forex useful indicators for breakout traders, since they want to catch the initial price move with high momentum following the breakout of important technical levels. Examples of momentum indicators are the Relative Strength Index (RSI), Stochastics, Commodity Channel Index (CCI) and so on. Some of you may already be familiar with those names, as they are among the most used indicators in Forex trading.
  3. Volatility indicators: Finally, volatility indicators measure the volatility, or the relative rate of price moves of a market. If the price moves quickly up or down in a short period of time, that market is considered very volatile. On the other hand, if the price moves slowly, we’re talking about non-volatile markets. Bollinger Bands and the ATR (Average True Range) are examples of popular Forex trading indicators that measure the volatility of a currency pair.

Forex indicators and how to use them

Before we move on and list the best Forex indicators to use, let’s cover some basics on how they’re applied to the chart and how to change their settings.

Generally, there are two types of technical indicators depending on where they appear on the chart. The first group is applied directly to the price chart itself (moving averages, Fibonaccis…), while the second group appears in a separate indicator window just below the price chart (RSI, Stochastics, ADX…).

Once you apply an indicator to the chart or indicator window, you can easily change its properties in the Indicator Settings window. If you’re using MetaTrader 4, simply right-click on the indicator and select Properties from the drop-down menu. In the case of moving averages, the menu looks like this:

Try to play with a few different settings to see how the indicator’s behaviour changes. Usually, traders change the period-setting of an indicator to make it more volatile to fresh price action, as shorter periods put more weight on the most recent prices.

In the following lines, we’ll list the best Forex chart indicators, show you how to use Forex indicators, and try to answer which indicator is best for Forex trading.

Forex chart indicators explained

Moving averages

Moving averages are among the best technical indicators for Forex trading. As their name suggests, moving averages show the average price over a pre-specified number of trading sessions and plot it directly on the chart. For example, a 10-day moving average would plot the average price over the last ten trading days, while a 20-period moving average on a 4-hour timeframe would plot the average price of the last twenty 4-hour bars. Given their simplicity, moving averages are probably the best Forex chart indicators for day traders.

There are two main types of moving averages: simple moving averages (SMA), and exponential moving averages (EMA). The main difference between them is the way they calculate the average price. Since EMAs use an exponential approach and put more weight on recent price action, they tend to react more quickly to price changes than SMAs.

In addition to being a trend-following indicators (moving averages point up in uptrends, and down in downtrends), they can also be used to identify dynamic support and resistance zones. In this regard, the 50-day, 100-day and 200-day moving averages are extremely popular and the price might find it challenging to break through these lines.

Moving averages also form one of the basic technical trading strategies in Forex, called the Moving Average Crossover. In this strategy, traders apply two MAs to their chart, one slower MA (higher period-setting) and one faster MA (shorter period-setting). A bug signal occurs when the faster MA crosses the slower MA from below, while a sell signal occurs when the faster MA crosses the slower MA from above. This is shown on the following chart, using two EMAs – one with a 5-period setting (the fast EMA), and one with a 50-period setting (the slow EMA).

Whether you use EMAs or SMAs in your trading, moving averages are one of the top Forex indicators for all trading styles, so make sure to incorporate them into your trading strategy.

Fibonacci tools

Fibonacci tools are also some of the best technical indicators for Forex. Named after famous Italian mathematician Leonardo Fibonacci, who discovered the Fibonacci sequence of numbers (1,1,2,3,5,8,13…), Fibonacci tools are used to measure the extent of a correction during an uptrend or downtrend.

Whenever a market makes a strong upwards or downwards move, market participants who lock in their profits and buyers/sellers who perceive the new price as too low/high start to enter the market, creating a short-term price correction in the opposite direction of the underlying trend. That’s why you see the price on a chart fluctuating and zig-zagging from highs and lows.

The Fibonacci retracement tool measures the extent of the correction from the recent low to a recent high using ratios based on the Fibonacci sequence of numbers. Since a price correction usually reaches 50% of the previous move, Fibonacci retracement levels of 38.2% and 61.8% (also called the Golden Ratio) are followed by traders worldwide and can host a large number of market orders, basically acting as support or resistance for the price. The following chart shows how the price respects the 61.8% Fibonacci retracement level, after which the price returns to its previous uptrend.

Once the price shows to respect a Fibonacci retracement level, another tool called Fibonacci extension levels is used to determine where the price might go in the future. By combining these two Fibonacci indicators, traders get one of the most reliable technical indicators in Forex and one of the best Forex indicators to use together.

Fibonacci levels are one of the top indicators for Forex trading, and many trend-following strategies can be built around them making it one of the best Forex trading strategy indicator.

Average directional movement index

The Average Directional Movement Index (ADX) is a technical indicator that measures the strength of an uptrend or downtrend. When applied to the chart, the ADX appears below the main price chart in a separate indicator window, and consists of three lines: the +DI and –DI directional indicators, and the Average Directional Index. By combining all three lines, traders can determine both the strength and the direction of a trend.

In general, when the +DI line crosses above the –DI line, an uptrend is present in the market. Similarly, when the –DI line crosses above the +DI line, we have a downtrend. The strength of the trend is determined by the value of the ADX, with readings above 25 suggesting that the market is trending. Readings above 50 show a strong trend, and above 75 an extremely strong trend. On the following chart, you can see how the ADX can be used to generate trading signals. A cross of the –DI and +DI lines, combined with an ADX reading of above 25 (meaning the market is trending), can be used to enter the market.

However, don’t base your trading decisions solely on the ADX or any other technical indicator. Since they are based on historical prices, technical indicators tend to lag and you may miss a good part of the move before they trigger a trading signal. Also, pay attention that the ADX, just like other indicators, can generate false and losing signals from time to time.

If you learn to interpret the ADX indicator correctly, it can be combined with other trend-following Forex trading technical indicators to form a complete technical trading strategy.

Oscillators – Relative Strength Index (RSI) and Stochastics

Oscillators, or momentum indicators, are another group of good indicators for Forex trading. They include indicators such as the Relative Strength Index (RSI) and Stochastics, which are proven Forex indicators that work.

The Relative Strength Index (RSI) measures the momentum of a price move relative to time, and can return a value between 0 and 100. Developed by Mr. Wilders, the RSI is popularly used to determine overbought and oversold market conditions. An RSI value above 70 signals an overbought market where the price may soon reverse and fall down, while an RSI value below 30 signals an oversold market where the price may soon go up. However, you should note that markets can stay oversold and overbought for a long period of time, so you shouldn’t base your trading decisions solely on the value of the RSI indicator. Also, trading oversold and overbought market conditions is generally considered as a counter-trend trading approach, which can be riskier than a trend-following approach. Trading RSI levels that are overbought and oversold is shown on the following chart. Pay attention to the fake signals that the indicator may generate from time to time.

Similar to the RSI, the Stochastics is also an oscillator which can range between 0 and 100. Unlike the RSI where the 30 and 70 levels are considered as thresholds for oversold/overbought market conditions, in the case of Stochastics those levels are 20 and 80. Since both indicators are oscillators, they return similar results when applied to a chart. The following chart shows how to use the Stochastics indicator to trade overbought and oversold levels in a ranging market (the ADX could be used to determine whether a market is ranging or trending).

Whether you go with the RSI or Stochastics, you can rest assured that both are top-rated Forex indicators that work.

What is the best indicator for Forex trading?

Picking the best indicator for Forex trading is not an easy task. All of the mentioned indicators are good indicators for Forex trading, and they’re used in different market conditions and cater to different trading styles. Since all indicators lag the current price, you should be cautious when using them as Forex trading forecasting indicators. Alternatively, try to avoid placing trades based solely on technical indicators, and try to use them as confirmation tools instead.

Moving averages are probably the most popular technical indicator on our list, and traders around the world use them as a trend-following tool or as dynamic support/resistance lines. Fibonaccis also have a proven track record, just like the RSI, ADX, and Stochastics. So if you’re asking what the best Forex indicator is, all of them could be a winner depending on your preferred trading style.

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