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Sunday, 6 October 2019

Get to know how to trade with indicators

For most traders, finding the ideal trading strategy is a basic "obligation" before starting trading. Good trading strategies are considered to be able to guide them in obtaining profits as expected. Well, one way is trading with indicators. This indicator is considered important as a tool to determine market conditions before trading. Of course, the use of this indicator must be adjusted to the intended purpose of the user, so it is not just as long as it is applied during trading activities. Then, what indicators are commonly used in trading? 1. Trend Direction Indicator Getting profit by countering trends (counter-trends) is not impossible. However, most traders prefer to follow the direction of the trend (trend following) to get maximum profit. At this time the indicator of the direction of the trend is needed, in order to know the continuation of the direction of price movements whether it will rise (uptrend) or vice versa (downtrend). In this case, the simple indicator commonly used is Moving Average (MA).

In the example of the USD / JPY chart above, the indicator used is the MA in period 20. Traders can recognize trend changes by looking at the relative position of the Moving Average line to the price chart. If the price is now below the Moving Average line, there is a downtrend. Conversely, if the price is now above the Moving Average line, then there is an uptrend. However, this Supreme Court is classified as a lagging indicator because it has only been formed when the price has occurred. So, to minimize this weakness, traders need to balance with other indicators in order to obtain a more accurate and thorough confirmation of the trend direction. 2. Trend Confirmation Indicator As mentioned before, trading with MA indicators allows signal errors due to delays in responding to price movements. Therefore, an additional indicator is needed that measures whether the direction indicated by the MA can still be used as a trading benchmark, or it has exceeded its momentum. However, this indicator is not intended as a conformation for entry, but only to confirm the direction of the trend indicated earlier. The indicator in question is the Moving Average Convergence Divergence (MACD). Basically,

But one thing to keep in mind: neither the indicator of the direction of the trend or confirmation of the trend, is not used as an indicator to determine the position of the entry. Both of these indicators are used by traders only to provide deeper confidence before deciding to open a position. 3. Overbought and Oversold indicators After knowing the direction of the trend and confirming it, the next step is to look for the right opportunity for entry. If we just go straight into the entry, then we do not know the condition of the strength of the trend at that time, whether it is still strong or has approached saturation levels. A saturated level means it's prone to a correction (retracement), and continued correction can cause prices to reverse (reversal).

To determine the saturation level of a price movement, whether it has reached an overbought or oversold condition, the appropriate indicator is the Relative Strength Index (RSI). Entry can be done when the price reaches the Overbought level, because the assumption is the price is not strong enough to continue the increase and will immediately turn down Conversely, when the RSI signals Oversold's condition, traders can take entry buy. RSI can accumulate the movement of a chart during a certain time span, and calculate it into a number from 0 to 100. The number 20 on the RSI can be interpreted that the price is in Oversold conditions, and the number 80 is an Overbought condition. But not all traders use the same size for these conditions. On the USDJPY chart below, the reference used for Overbought is at level 70, while Oversold is at level 30.

4. Indicators of Profit Taking After entry, we must know the most optimal level for Exit from the market, not only based on estimates alone. From the example above, RSI can also be used as an indicator for Exit or profit-taking. Suppose the trader previously entered with an Oversold signal, then he could wait until the RSI signal showed Overbought to close long positions. However, the RSI arena above is not suitable for trending conditions, so to avoid mistakes, traders can also use the Bollinger Bands (BB) indicator. Bollinger Bands are one of the technical indicators to measure volatility and determine the direction of price movement trends. The distinctive feature of the BB indicator is the existence of three bands (upper, middle, and lower band) with forex price movements in it. Many BB indicators are chosen by traders as profit taking indicators, because BB can collect historical price data to form it.

Traders who are currently open Buy positions can take profit when the price touches the top line of the channel (Exit Buy). While traders who are open Sell positions can take profit when the price touches the lowest channel line (Exit Sell).

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