Trading currencies can be challenging for traders, thanks to the market’s volatility. Inexperienced traders without outside help run the risk of losing their investment if they don’t understand the market properly.
Experienced traders leverage the power of some technical indicators for technical analysis before trading their preferred currencies. What are these technical indicators and how do they help traders overcome the challenges of trading currencies?
What are Technical Indicators?
Investopedia defines technical indicators as “heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis.”
Traders, with the help of such indicators, can analyze historical data that may help them to accurately predict future price movements and make right investment or trading decisions.
Traders can choose from an array of technical indicators for effective analysis. Some of the best technical indicators are:
Hull Moving Average
Alan Hull developed the Hull Moving Average (HMA) to increase responsiveness while simultaneously eliminating noise and reducing lag. The indicator was designed to respond swiftly to trend changes while maintaining the smoothness that makes it easier for users.
Alan adopted two weighted moving averages (WMAs) of the price of an instrument and another WMA to ensure it gets a smooth moving average.
To achieve the desired result, it calculates the Hull Moving Average with the following formula:
HMA = WMA (2*WMA (n/2) − WMA (n)), sqrt (n))
Where:
WMA = Weighted Moving Average
N = time
Hull Moving Average is a multifunctional technical indicator that can serve these functions:
- To anticipate trend reversals
- To identify trending markets
- To identify the formation and breakout of new trends.
The Hull Moving Averages helps traders to determine a bearish or bullish market condition using available historical data and recent price action.
The HMA is displayed in two dimensions: directional value and positional value. The latter is used to determine the asset’s location relative to its price while the former is derived from the current market slope’s direction.
The combination of both values makes HMA both responsive and smooth. The rule of thumb is to sell when the HMA turns down and buy when it turns up.
Relative Strength Index (RSI)
Relative Strength Index is a type of technical indicator that is designed for measuring the magnitude and speed of the recent price changes of a security. The analysis with this tool helps traders to evaluate a security price’s undervalued or overvalued conditions.
Besides helping traders to identify oversold and overbought currencies, RSI can also be used to determine securities that are ripe for corrective price pullback or trend reversal.
With the provided signal, short-term traders can determine the appropriate time to acquire more currencies or dispose of their assets. That is in addition to helping traders to predict a security’s price behavior and working with other indicators for effective trading.
Money Flow Index
Money Flow Index is another helpful technical indicator for technical analysis. It uses volume and price to identify an asset’s oversold or overbought signals.
It is also a powerful tool for spotting divergences that warn traders of price change when the oscillator is between 0 and 100.
When using this technical indicator, values below 20 indicate oversold conditions while values above 80 show overbought conditions. This knowledge will always come in handy for traders.
With the aid of some technical indicators such as the Hull Moving Average, you can analyze the market better and understand when it is wise to invest and when selling your asset is the wise course.
