Forex trading is both an art and a science, but we must say that it veers toward science most of the time. This is evidenced by the reliance of forex traders on trading signals that are, in turn, provided by computerised programs. We shall discuss two of the most commonly used trading signals used by traders to decide when to buy and when to sell currencies.
First, the Moving Average Convergence Divergence (MACD) displays the relationship between two types of moving averages, thus, its usefulness as a momentum indicator. It is computed by subtracting the 26-day EMA from the 12-day EMA. The resulting MACD is then charted along with the signal line the 9-day EMA, in this case, the latter plotted on top of the former which then functions as the trigger for buying and selling.
There are three ways in which the MACD is used to signal buying and selling in forex trading, as follows:
Crossovers The signal line is your point of reference, of course. When the MACD falls below it, you may think of selling. When the MACD rises above it, you have reason to buy. However, we suggest waiting for confirmation via a cross over the signal line lest you enter into an undesirable position and, thus, lose out on the game.
Divergence Look at the price of the currency. If it deviates from the MACD, it is a signal that the current trends are changing so you must change your position as necessary.
Dramatic Rise The currency may be overbought and, thus, will return to normal levels in the near future when the MACD rises in a dramatic manner. Plan your position accordingly.
Yes, we have to admit that using MACD in forex trading takes practice. This is a must, nonetheless, for success in the business so you may as well learn and master it now.
Second, the parabolic SAR is a technical analysis approach utilising a trailing stop and reverse method in deciding on the best entry and exit points in a forex deal. SAR stands for stop and reverse or stop-and-reversal obviously. In a graph, it consists of dots fluctuating below and above the candlesticks.
The general rules in using parabolic SAR (PSAR) in forex trading are:
If the currency is trading below the PSAR, sell.
If the currency is priced above the PSAR, buy. Or in the words of traders, stay long.
To state it in terms of a graph, sell when the dots are below the candlesticks and buy when the dots are above the candlesticks. Of course, you must take into account other factors but these are relatively reliable and strong signals, so your first informed instinct is to go for it.
Combining the MACD and PSAR in forex trading is a great way to earn more profits from the activity. Study these two concepts intensively and you should be able to take advantage of your newfound knowledge.