More Technical Trading Indicators

More Technical Trading Indicators

After learning about Fibonacci, getting familiar with other popular technical indicators is essential. These indicators are essentially mathematical formulas that help analyze price movements.

Prices in the market fluctuate constantly, and indicators help us recognize patterns and trends within this data. They make it easier to identify potential trading opportunities. On most trading platforms, you’ll find a variety of technical indicators available. They can be displayed directly on the charts or in separate panels beneath them.

Using technical indicators can enhance your trading strategy by providing additional insights into market behavior. Combining indicators can help confirm trends, identify entry and exit points, and improve your overall decision-making process.

More Technical Indicators:

• Moving Averages – Average prices over specific periods smoothing trends.
• RSI – Measures speed and change of price movements.
• Bollinger Bands – Volatility indicator using standard deviations from averages.
• MACD – Trend-following momentum indicator showing price direction changes.
• Stochastic – Compares closing price to price range over time.
• ADX – measures trend strength without indicating trend direction.
• SAR – Indicator showing potential price reversals in trends.
• Pivot Points – Calculated levels indicating potential support and resistance.

There are many technical indicators available, but you don’t need to use them all! Using too many can lead to confusion and mistakes. It’s best to Stick with 2 to 3 powerful indicators you understand well is best. This will help you make better trading decisions and improve your efficiency.

In your first couple of months, use no more than two indicators at a time. Focus on mastering one before adding another. The indicators we will introduce are our favorites and have proven successful.

Think of these indicators like formulas for a math exam. You can learn the theory, but you must practice it with them to know how to use it effectively.

Using Technical Indicators

We mentioned that indicators are formulas. These formulas are based on past and present prices to try to foresee the expected price. The indicators box is situated in the chart Tools Tab (or Indicators Tab) on the trading platforms.

Let’s see what it looks like on eToro’s WebTrader platform:

See how it looks the Markets.com trading platform

Now time to meet our indicators:

Moving Averages

Understanding Price Fluctuations:

Prices in the market can change frequently during each trading session. This can make it hard to spot a clear trend.

What Are Moving Averages?

Moving averages help bring clarity to these price movements. They calculate the average closing prices of a currency pair over a specific period.

Timeframes:

A single candlestick can represent different timeframes, like 5 minutes, 1 hour, or 4 hours. Traders can choose which timeframe they want to analyze based on their trading style.

Why Use Moving Averages?

They are great for:

• Identifying the overall direction of the market.
• Analyzing how a currency pair behaves over time.
• Predicting future trends, especially when combined with other indicators.

Reaction to Market Changes:

A smoother moving average (one without big ups and downs) reacts more slowly to market changes. This means it may not catch sudden price movements right away.

There are two main types of moving averages:

What is SMA?:

The Simple Moving Average (SMA) is created by connecting all the closing prices of a currency pair over a specific timeframe. It calculates the average price based on those closing points.

How SMA Works:

SMA helps indicate future trends by averaging past prices, but it reacts a bit slowly to market changes because it’s based on historical data.

Impact of Extreme Events:

One-time, significant price changes during the chosen timeframe can heavily influence the SMA. This can sometimes give the wrong impression of a trend, as these extreme values affect the average more than moderate values do.

Example of SMA in Action:

In a chart with three SMA lines –

• The blue SMA averages the last 5 closing prices.
• The pink SMA averages 30 closing prices.
• The yellow SMA averages 60 closing prices.

You’ll notice that as the number of candlesticks (prices) increases, the SMA becomes smoother and responds more slowly to changes in the market. This means it might be further away from the real-time price

Remember: When an SMA line cuts a Price line, we can predict with relatively high probability a coming change in the trend’s direction. When the price cuts average from below upwards, we are getting a buying signal, and vice versa.

An example of the moving average of a forex chart:

Let’s take a look at another example:

Pay attention to the cutting points of the price line and SMA line, and especially to what happens to the trend right afterward.

Tip: The best way to use this SMA is to combine two or three SMA lines. By following their cutting points, you can determine expected future trends. It increases our confidence in shifting the trend direction – as all the moving averages are broken, as in the following chart:

What is EMA?

The Exponential Moving Average (EMA) is similar to the Simple Moving Average (SMA). Still, it differs in one important way: it gives more importance to the most recent prices (the latest candlesticks).

How EMA Works

Because the EMA focuses more on the latest data, it reacts quickly to recent price changes. This makes it a useful tool for traders looking to respond swiftly to market movements.

Comparing EMA and SMA

When you look at a chart, you’ll notice that the EMA line is often closer to the current price than the SMA line. The EMA uses more weight on recent prices, while the SMA averages all prices equally.

Visual Differences

In the charts, you can see the gaps that form between the EMA, SMA, and the actual price. These differences show how EMA responds faster to market changes compared to SMA.

Remember: While EMA is more effective in the short term (it responds quickly to the price’s behavior and helps to spot a trend early on), SMA is more effective in the longer term and is less sensitive. It is more solid and responds more slowly.

Pros and cons of SMA AND EMW

If the price line stays above the moving average line – the trend is an uptrend, and vice versa. Both SMA and EMA have their advantages and disadvantages. The choice between them depends on the trading strategy and time frame a trader is using. SMA provides a smoother representation of price trends, making it helpful in identifying longer-term trends and reducing noise. However, it may result in delayed signals.

On the other hand, EMA is more responsive to recent price changes, which is beneficial for short-term trading but can also lead to more false signals. Traders should consider their needs and market conditions when selecting which moving average to use.

Example: Notice the excellent usage of EMA as a resistance level in the following chart (SMA can also be used as a support/resistance level, but we prefer using EMA):

Now, let’s examine the usage of two EMA lines (two timeframes) as support levels:

When candles hit the inner zone between the two lines and turn back, we will execute a Buy/Sell order! In that case, We Will Buy.

One more example: The red line is a 20′ SMA. The blue line is a 50′ SMA. Pay attention to what happens each time there is an intersection – the price moves in the same direction as the red line (shorter term!):

Important: Averages can get breached, exactly like support and resistance levels:

To sum up, SMA and EMA are fantastic indicators. We strongly recommend you practice them well and use them when trading.

RSI (Relative Strength Index)

It is one of the few Oscillators that you will learn about. RSI operates as an elevator that moves up and down on the market’s momentum scale.

RSI (Relative Strength Index)

What is RSI?

The RSI is a popular tool for traders that measures the strength of a currency pair’s momentum. It acts like an elevator, moving up and down based on market movement. RSI helps traders understand if a currency is overbought or oversold.

How RSI Works

• RSI operates on a scale from 0 to 100.
• When the RSI is below 30, the pair is oversold, and it’s often a good Buy signal.
• When RSI is above 70, the pair is overbought and often a good Sell signal.

Other RSI Levels

More aggressive traders may look at 15 (for an even stronger Buy signal) and 85 (for an even stronger Sell signal), but these levels are riskier.

Conservative traders often watch the 50 level. When RSI crosses 50, it indicates that the trend has fully reversed.

This chart visually explains how the Relative Strength Index (RSI) operates.

The bottom of the curve, marked at RSI = 30, indicates an oversold condition. This means the asset’s price has dropped significantly and might be a good time to buy.

Oversold: When the RSI is at or below 30, it suggests that the asset has been sold excessively and could be due for a rebound.

The top of the curve, marked at RSI = 70, indicates an overbought condition. This means the asset’s price has risen too much, which might be a good time to sell.

Overbought: When the RSI is at or above 70, it suggests that the asset has been bought too much and could be due for a pullback.

The chart shows how RSI fluctuates between these two extremes, helping traders decide whether an asset will likely reverse its trend soon.

Let’s see how it looks on the trading platform:

See on the left-hand side how an RSI higher than 70′ signals a coming downtrend; crossing the 50′ level confirms the downtrend, and going below 30′ indicates an oversold condition. It’s time to think of exiting your SELL position.

Pay attention to the following chart to breached points 15 and 85 (circled) and to the subsequent change in direction:

Stochastic indicator

This is another Oscillator. Stochastic informs us of a potential trend end. It helps to avoid Oversold and Overbought market conditions.

Here’s a simplified explanation of using the RSI and Stochastic Oscillator for trading:

RSI works well across all timeframes, especially when combined with other indicators like trend lines, candlestick patterns, and moving averages.

Stochastic Oscillator is another popular tool that operates similarly to RSI, with a scale from 0 to 100.

A red line is set at 80, indicating overbought conditions. When the price goes above this line, there are too many buyers, and it’s an excellent time to consider selling.

A blue line is set at 20, indicating oversold conditions. When the price dips below this, there are too many sellers, and it may be an excellent time to buy.

For example, if you look at a USD/CAD 1-hour chart, you might see these levels to guide your buy or sell decisions. When used together, these indicators help confirm market conditions and improve decision-making.

Stochastic works the same way as RSI. The chart clearly shows how it signals coming trends.

Bollinger Bands

Bollinger Bands are a popular technical indicator used to help traders understand market volatility (how much the price moves up and down) and to identify potential entry and exit points for trades. They are made of 3 lines: the upper and lower lines create a channel that is cut in the middle by a central line

How Bollinger Bands Work:

• Middle Band: This is a Simple Moving Average (SMA), usually calculated over 20 periods. It helps show the average price over time.
• Upper Band: This is placed above the middle band, showing the upper price limit based on recent volatility.
• Lower Band: This is placed below the middle band, showing the lower price limit based on recent volatility.

Key Points

1. When the price touches the upper band, the asset could be overbought (the price has gone too high), which might indicate a good time to sell.
2. When the price touches the lower band, the asset could be oversold (the price has dropped too low), which might indicate a good time to buy.
3. Bollinger Band Squeeze: When the upper and lower bands close together, the market is quiet with low volatility. This usually signals that a significant price movement might happen soon, but it’s hard to tell in which direction.
4. Bollinger Band Expansion: The market is highly volatile when the bands spread far apart. This often signals that a strong trend is continuing.

Examples

If the price keeps touching the lower band over time, the market is in a downtrend (prices are falling).

• If the price keeps touching the upper band, the market is in an uptrend (prices are rising).

In Summary

Bollinger Bands helps traders see when prices might be too high or too low based on historical patterns. They are great for spotting potential market turning points, but they should be used together with other indicators for more accurate trading decisions.

Let’s look at the chart and learn more about Bollinger bands:

Our signal occurs when the price reaches one of the bands (top and bottom lines). Notice on the chart that the signal gets stronger when the price touches a certain band twice. In our case, you can identify a double touch on the bottom band (marked by green boxes)—this is a BUYING signal—and a second double touch on the top band (red boxes)—this is a SELLING signal.

Tip: Bollinger Bands operate as supports and resistances. They work fantastically when the market is unstable, and traders cannot identify a trend.

Bollinger squeezing – Great strategic way to examine the Bollinger Bands. This alerts us to a massive trend on its way while it gets locked on early breakouts. If sticks are starting to poke out on the top band beyond the shrinking channel we can guess that we have a general future, upward direction, and vice versa!

Check out this marked red stick that is poking out (GBP/USD, 30-minute chart):

In most cases, a shrinking gap between the bands indicates a serious trend! If the price is below the centreline, we will probably witness an uptrend and vice versa.

Let’s see an example:

Tip: Using Bollinger Bands on short timeframes, such as a 15-minute chart, is advised,

ADX (Average Directional Index)

Average Directional Index (ADX) is a technical indicator that helps traders measure the strength of a trend, whether it is going up or down. However, ADX does not tell you the direction of the trend—just how strong it is.

Key Points

ADX Scale (0-100)

• Above 50: This signals a strong trend, whether an uptrend or a downtrend.
• Below 20: This signals a weak or no trend, meaning the market is moving sideways, also called “ranging.”

How to Use ADX

• If ADX is above 50, there is a strong trend, and the market is moving clearly in one direction. It’s a good time to stay in the trade.
• If ADX drops below 50, the trend’s strength is fading, and it may be a good time to exit the trade.
• If ADX is below 20, there is no strong trend, so it’s harder to make good trading decisions based on trends.

Example of the EUR/USD using ADX trading strategy:

Example

• In a EUR/USD chart, if the ADX line is above 50 (highlighted in green), you know the downtrend is strong. When the ADX drops below 50, the trend weakens, signaling it might be a good time to close your position.
• When the ADX is below 20 (highlighted in red), it means there is no clear trend, and the market is moving sideways, making it hard to trade based on trends.

Tip:

ADX works best when combined with other indicators that show trend direction (since ADX only shows strength). It can help you decide when to exit a trade before the trend fully loses strength.

In short, ADX helps students measure the strength of a trend, but for best results, they should use it alongside tools that show trend direction.

MACD (Moving Average Convergence Divergence)

MACD (Moving Average Convergence Divergence) is a popular technical indicator used to identify market trend reversals. It helps traders spot when the market is about to change direction, either up or down.

How MACD Works:

MACD consists of two moving averages: a short-term average and a long-term average.

Below the price chart, you will see two lines (one for each average) and a histogram that shows the difference between the two lines.

It’s not the price average but the average of two timeframes, so it gives you a good idea of past market trends.

What to Watch For:

Intersection of the lines: The most important thing to notice is when the two moving averages cross each other. This intersection is a strong signal of a potential trend reversal (a shift from an uptrend to a downtrend or vice versa).

Disadvantage:

MACD is based on past data, meaning it looks at averages of past prices, so it tends to lag behind real-time price changes. However, it’s still a reliable tool to predict trend changes.

Example

• If the short-term average (red line) crosses above the long-term average (green line), it signals a possible uptrend.
• If the short-term average crosses below the long-term average, it indicates a possible downtrend.

Tip: MACD + Trendline work well together. Even though MACD can be a bit slow because it looks at past averages, it’s great for spotting early signals of trend changes. Combine it with other indicators for more accurate results.

In summary, MACD helps students identify when a trend is about to reverse by looking at the intersections of two moving averages. It’s simple and effective, though it works best alongside other tools to confirm its signals.

Notice the duplication between the Trend-line and MACD’s alerts (Sell signals).

Tip: MACD + Channels are also a good combination:

Parabolic SAR

Parabolic SAR (Stop and Reverse) is distinguished from indicators that identify trends’ beginnings and help identify trends’ endings. It is a technical indicator that helps traders identify the end of a trend and potential reversals in price movement. Unlike other indicators that focus on trend beginnings, SAR shows when a trend might be finishing and when a reversal could start.

How Parabolic SAR Works:

The Parabolic SAR appears on the price chart as a series of dotted lines.

When the dots are below the price, it signals a buying opportunity because the uptrend is continuing.

When the dots are above the price, it signals a sell opportunity because the uptrend is likely ending, and the price may soon drop.

What to Look For:

The main thing to watch for is when the price crosses the SAR dots.

If the price moves below the SAR dots (when they are above the price), this suggests the uptrend has ended, and it might be time to sell.

If the price moves above the SAR dots (when they are below the price), the downtrend has ended and it might be time to buy.

EUR/JPY:

EUR/JPY Example:

• In a chart of EUR/JPY, if you see the SAR dots switch from above to below the price, it’s a signal to buy.
• If the SAR dots switch from below to above the price, it’s a signal to sell.

Tip:

• The Parabolic SAR is easy to use and is a great tool for spotting reversals, but like any indicator, it works best when combined with others to confirm its signals.

In summary, the Parabolic SAR is a simple, visual tool that shows when to buy or sell based on the placement of dots relative to the price, helping students easily spot trend reversals in their trading strategies.

Pivot Points

Pivot Points (PP) are a popular trading tool for identifying potential support and resistance levels. They help traders understand where the price might bounce (support) or reverse (resistance).

How Pivot Points Work

• Pivot Points are calculated using the average of the previous candlesticks’ Low, High, Opening, and Closing prices (the candles you see on the chart).
• This calculation gives you a central point (the Pivot Point) and several support and resistance levels.

Why Use Pivot Points?

• Effective for Short-Term Trading: Pivot Points are beneficial for short-term trading strategies like intraday (within a single day) and scalping (quick trades for small profits).
• Objective Tool: Unlike other indicators, Pivot Points provide precise levels to follow, helping avoid personal biases or subjective decisions.

How to Use Pivot Points

Identify Key Levels:

The main Pivot Point (PP) is your central reference point.

There are usually additional levels:

Support Levels: These are below the Pivot Point and suggest where the price might increase.

Resistance Levels: These are above the Pivot Point and suggest where the price might reverse.

Setting Stop-Loss and Take-Profit:

You can use these levels to set your Stop-Loss (the price at which you will exit a losing trade) and Take-Profit (the price at which you exit a winning trade) orders.

Example: When you plot Pivot Points on a chart, vertical lines are drawn at these key levels, creating a framework that helps you make trading decisions.

PP = Pivot point ; S = Support ; R = Resistance

If the price is within the support area, we will go long (buy), not forgetting to set a Stop Loss beneath the support level! And vice versa—if the price comes near the resistance area, we will go short (sell)!

Look at the chart above: Aggressive traders would set their Stop Loss Order above S1, while more conservative traders would set it above S2. The conservative traders will set their Take Profit Order at R1, while the more aggressive ones will set it at R2.

A pivot point is a trade’s zone of balance. It acts as an observation point for other forces operating in the market. When it breaks up, the market goes bullish, and when it breaks down, the market goes bearish.

The pivot frame is S1/R1 is more common than S2/R2. S3/R3 represents extreme conditions.

Necessary: As with most indicators, Pivot Points work well with other indicators (raising chances).

Important: Don’t forget—when supports break, they often turn into resistances, and vice versa.

Summary

We have introduced you to two groups of technical indicators:

1. Momentum Indicators: These alert traders after a trend starts. You can relate to them as informers, letting us know when a trend arrives. Examples of momentum indicators are Moving Averages and MACD.

Pros—They are safer to trade with and, if used correctly, can score higher results.

Cons – They sometimes “miss the boat,” showing too late, and missing significant changes.

2. Oscillators Alert traders just before a trend starts or changes direction. You can relate to them as prophets. Examples of oscillators are Stochastics, SARs, and RSIs.

Pros – When hitting the target, they provide us with significant earnings. Through very early identification, traders enjoy the total trend.

Cons -Prophets are sometimes false prophets. They can cause cases of mistaken identity. They are suitable for risk lovers.

Tip: We strongly recommend getting used to working simultaneously with indicators from both groups. Working with one indicator from each group is very effective. This method restrains us when needed and pushes us to take calculated risks on other occasions.

We also love working with Fibonacci, Moving Averages, and Bollinger Bands. We find them all very effective!

Remember: Some indicators we relate to are support/resistance levels. Try to remember which ones we are talking about. For instance, Fibonacci and Pivot Points are extremely helpful when trying to spot breakouts and set entry and exit points.

Let us remind you of the indicators that you found in your toolbox:

• Please welcome… The Fibonacci Indicator!
• Second to come on the stage… Moving Average!
• Next in line is… RSI!
• Clap your hands for… Stochastic!
• Who’s next?… Bollinger Bands!
• Let us welcome… ADX Strategy!
• Give your applause for… MACD!
• Before ending… Parabolic SAR
• Last but not least… Pivot Points!

We remind you not to use too many indicators. You should feel comfortable working with two or three indicators.

Tip: You have already tried and practiced your demo accounts so far. For those who wish to open real accounts as well (to attempt to get some real-deal experience), we recommend opening relatively low-budget accounts. Remember, the higher the gain potential, the higher the risk of losing. We believe you should not deposit real money before practicing more and doing the next exercise.

$400 to $1,000 is considered a relatively modest amount for opening an account. This range can still produce very nice profits for traders, although it is recommended to be extra cautious when trading with these amounts. For those who are incredibly eager to open an account no matter what, some brokers allow you to open an account with lower capital, even down to 50 dollars or euros (Though we do not recommend opening such a small account at all! Chances for excellent profits are small, and risks remain the same).

Tip: If you have concluded that technical analysis is the best way to trade for you and are ready to find a good broker and open an account, we can recommend great brokers. Their trading platforms, toolbox, and user comfort are the best in the industry, along with strong performance and reliability. Click here to visit our recommended brokers.

Practice

Go to your demo account. Let’s practice the subjects that you have learned in this chapter:

The best advice that we can give you is simply to experience all the indicators that you have learned in the last lesson on your platforms. Remember, demo accounts operate in real-time and on accurate charts from the market.

The only difference is that you don’t trade real money on demos! Therefore, it is a fantastic opportunity to practice technical indicators and trade on virtual money. Work at first with each indicator separately, then begin trading with two or three indicators simultaneously.

Revision Questions

1. Bollinger Band: What do you think would happen next?

2. Moving Averages: What do you think will appear next? (Red line is 20′ and blue is 50′)

3. What are the two prominent groups of technical indicators? What is the main difference between them? Give examples of indicators from each group.
4. Write down two indicators that act as efficient supports and resistances.

Answers

1. By noticing the contact between the candles and the lower band, followed by breaking it, we can assume that the sideway trend is about to finish and the shrunken bands are about to expand, with the price going down for a downtrend:

2. Moving Averages

3. Oscillators (Prophets); Momentum (Informers).

• Momentums inform on trades that have just begun; Oscillators foresee coming trends.
• Momentum- MACD, Moving Average.
• Oscillators- RSI, Parabolic SAR, Stochastic, ADX

4. Fibonacci and Pivot Points