If you want your trades to make substantial profits for you, you must understand how to analyse charts. Luckily, it’s not rocket science. All you need is access to some analytical tools. These tools provide the foundation for analysing the forex market and making more informed trading choices. If you are wondering where you can find these tools, you must stop thinking and explore your trading platform, especially if you are using MetaTrader 4 or Metatrader 5. These platforms are loaded with many useful features, including several technical and analytical indicators to help you generate signals and increase profitability. You can test them on a demo account. Before we talk about these tools, here’s a word of advice: don’t go overboard with them. Too many tools can clutter your decision-making process or give you conflicting readings. Keep it simple, and you will be able to harness their full potential.
Forex Analytical Tools Can Be Divided Into Two Categories:
The two types of analytical tools for analysing the markets are:
Overlays: Overlays are placed on the price chart, giving you important insights. Some popular overlays include moving averages, parabolic SAR, Fibonacci retracements and Bollinger bands. They all serve different purposes but are about studying the price and its movements.
Oscillators. Oscillators are tools that help you spot when currencies are overbought or oversold, especially in those non-trending market conditions. By using oscillators, you can identify key entry and exit points. Examples of oscillators include RSI (Relative Strength Index), stochastic indicators, and more. They’re great for catching those price swings and finding opportunities. It is suggested that these indicators should be used in a demo account to determine how they work. Check the functioning of the indicators in the demo to get a good idea about their functioning and effectiveness before using them in the live account.
1. On-balance Volume: Forex traders don’t pay enough attention to On-balance volume (OBV), but it can be a really useful indicator to measure the buying and selling pressure in the market. The OBV indicator keeps a running tally of volume, adding it up on days when the price goes up and subtracting it on days when the price goes down. It’s not just about knowing the actual value of the OBV indicator. It’s more about paying attention to the rate of change. If the OBV is moving constantly in one direction, it’s a sign that a major price action is on the horizon. It’s like a signal saying, “Hey, get ready for something big!”
When the price and OBV make higher peaks and troughs together, that’s a good sign. It means the upward trend is likely to continue. It’s like a double confirmation that things are going up, up, and away! On the flip side, if both the price and OBV make lower peaks and troughs, it’s a warning sign because the trend is in the downward direction and so, traders must remain cautious.
When the OBV is on the rise during a trading range, it’s a hint that accumulation is happening and the market may witness an upward breakout. On the other hand, if the price is rising, but the OBV is falling, it could mean that the trend doesn’t have strong buyer support.
2. Accumulation Distribution Line: The accumulation/distribution line or A/D line is similar to the on-balance volume indicator but with a little twist. It takes into account not only the closing price of a security over a specific period but also the trading range for that period. It compares where the security finishes within that range. If security ends near its accumulation point, the A/D line shows more volume than when it finishes near the midpoint of the range.
Moreover, when the A/D line is trending upward, it’s a sign of buying interest. On the flip side, when the A/D line is falling, it means that the stock price is closing lower than its usual daily range. That negative volume suggests a downtrend is happening.
If the A/D line is falling while the price is going up, it’s like a warning sign. It suggests that the market might be on the verge of a reversal. On the other hand, if the price is low and the A/D line starts rising, it’s a hint that an upward trend is about to kick in.
3. Average Directional Index: The average directional index is called ADX for short. This tool helps to determine the strength and momentum of a market trend. When the ADX goes above 40 on the chart, it means the trend is strong, but when the ADX falls below 20, it indicates a weak or non-trending market.
When you look at the chart, you’ll see a black line representing the ADX. But wait, there’s more! You’ll also spot two additional lines called DI+ and DI-. These lines are in red and green, respectively. Together, these three lines help project the direction and momentum of the trend.
When the ADX is above 20, and DI+ is above DI-, it’s a signal of an uptrend. On the other hand, when the ADX is above 20 and DI- is above DI+, it indicates a downtrend. But when the ADX falls below 20? It’s a sign of a weak trend. In this case, the DI- and DI+ lines start rapidly crossing each other.
4. Aroon Indicator: Aroon indicator is used to determine the trend’s momentum and whether the price is making new highs or lows within a specific period. The Aroon indicator consists of two lines: the Aroon-up and Aroon-down lines.
The moment the Aroon-up and Aroon-down line crosses each other, consider it as a sign of the beginning of a new trend. If the Aroon-up line reaches 100 and stays there while the Aroon-down line hangs around zero, it’s a confirmation of an uptrend. So, keep an eye out for that golden combination.
If the Aroon-down line surpasses the Aroon-up line and the Aroon-up line is near 100, it’s a signal that a downtrend might be on the horizon.
5. MACD: Moving average convergence divergence is a trend indicator. When the MACD is above zero, it’s like a green light for an upward trend. When the MACD drops below zero, it’s like a red flag for a downward trend. The MACD is made up of two lines: the MACD line itself and a slower-moving signal line. These lines work together to give us more information. When the MACD is below the signal line, it suggests a falling price. But when the MACD is above the signal line, then it indicates that the price is on the rise. To make the most of this indicator, you want to pay attention to which side of zero the MACD lies on. If it’s above zero, you can look for buying opportunities when the MACD moves above the signal line. But if the MACD is below zero, you might want to wait for the MACD to cross below the signal line before considering a short-sell position.
Wrap Up
There are a ton of indicators and oscillators out there, but don’t overwhelm yourself with too many of them. It’s better to choose a few that resonate with you, master them, and incorporate them into your trading strategy. Quality over quantity is important. To figure out which analysis tools work best for you, you can try your favourite ones on a demo account. So, go ahead and explore these analytical tools for forex trading. Remember, less is often more in this case. Find the ones that work best for you and let them guide you towards better trades.
