Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis.
Traders use the Fibonacci retracement levels as potential support and resistance areas.
In order to find these Fibonacci retracement levels, you have to find the recent significant Swing Highs and Swings Lows.
Then, for downtrends, click on the Swing High and drag the cursor to the most recent Swing Low.
For uptrends, do the opposite. Click on the Swing Low and drag the cursor to the most recent Swing High.
Read more about Fibonacci Retracements here: https://www.babypips.com/learn/forex/fibonacci-retracement
Simple Moving Average (SMA)
A simple moving average (SMA) is the simplest type of moving average in forex analysis.
Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X.
If you plotted a 5 period simple moving average on a 1-hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5.
Voila! You have the average closing price over the last five hours.
Read more about Simple Moving Averages here: https://www.babypips.com/learn/forex/simple-moving-averages
Since simple moving averages (SMA) can be distorted by spikes, exponential moving averages (EMA) give more weight to the most recent periods.
Bollinger Bands, a chart indicator developed by John Bollinger, are used to measure a market’s volatility.
This little tool tells us whether the market is quiet or whether the market is LOUD!
Notice on the chart below that when price is quiet, the bands are close together. When price moves up, the bands spread apart.
MACD is an acronym for Moving Average Convergence Divergence.
This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish.
With an MACD chart, you will usually see three numbers that are used for its settings.
- The first is the number of periods that is used to calculate the faster-moving average.
- The second is the number of periods that is used in the slower moving average.
- And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.
There is a common misconception when it comes to the lines of the MACD.
The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages.
If you look at our original chart, you can see that, as the two moving averages separate, the histogram gets bigger.
This is called divergence because the faster moving average is “diverging” or moving away from the slower moving average.
As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average is “converging” or getting closer to the slower moving average.
Read more about MACD here: https://www.babypips.com/learn/forex/macd
Parabolic SAR (Stop And Reversal) helps us find where a trend might end.
A Parabolic SAR places dots, or points, on a chart that indicate potential reversals in price movement.
From the image below, you can see that the dots shift from being below the candles during the uptrend to above the candles when the trend reverses into a downtrend.
Basically, when the dots are below the candles, it is a BUY signal.
When the dots are above the candles, it is a SELL signal.
RSI (Relative Strength Index)
RSI helps us identify overbought and oversold conditions in the market.
It is also scaled from 0 to 100. Typically, readings below 30 indicate oversold, while readings over 70 indicate overbought. Typically, readings below 30 indicate oversold market conditions.
Readings over 70 indicate overbought conditions.
Read more about RSI here: https://www.babypips.com/learn/forex/relative-strength-index
The Stochastic oscillator is another chart analysis indicator that helps us determine where a trend might be ending.
Stochastic tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100.
When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold.
As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.