You can use technical indicators as integral components of your Forex trading strategy to assist you in identifying quality entry and exit points for your new trades. As you will have a multitude of these devices to choose from, two are now described in order to provide you with some insights that should help you make your selections.
The Stochastic Oscillator has acquired a solid reputation for effectively detecting new trading opportunities especially if price is producing stable trading patterns. You can utilize the SO to trade any currency pair although you will find that you will obtain better results if you install it on trading charts exhibiting the daily time-frame or higher.
You should consider opening a new position if you detect the faster-moving stochastic line crossing below or above the slower-moving one. You should exit your position at the next opposite crossover. You will discover that the SO is easy to use and will provide you with good trading opportunities.
However, you must appreciate that because the Stochastic Oscillator is a lagging indicator it can generate fakeouts. In addition, you may need to constantly tweak the SO’s settings constantly in order to optimize its performance to the ever-changing Forex trading conditions. You will have to contend with other problems as well such as the following.
Although the SO may be posting overbought or oversold readings, a currency pair does not realize this. Consequently, price could still surge further in its current direction without the expected retraction happening. Although such developments could result in the SO moving by a few extra points only, price could still surge of hundreds of pips or more.
Another very popular technical indicator is the Relative Strength Index (RSI). However you are advised not to depend on it just in isolation. Instead, if you incorporate the RSI into a full Forex trading Strategy then you could provide yourself with a solid foundation for your trading.
You should consider opening new long positions if you detect the RSI reading dropping below 30, bottoming out and then rebounding back above this level. Similarly, you should consider going short if you observe the RSI oscillating about its 70 line. You should exit your trades when you detect your long trades crossing the 70 line and when your shorts achieve readings of 30 or lower.
