Currency Trading Charts - How to Use the Main Indicators to Forecast Price Movements

Even if you're new to currency trading (or forex) then you'll certainly have come across currency trading charts. And with them invariably come a number of indicators designed to help you interpret what's been happening on the chart and, more importantly, what's most likely to happen in the future. This article will help you decide which of these indicators can help you the most and which can be ignored.

1. Simple Moving Average (SMA)

If, for example, you have a 30 period simple moving average setting then it shows you the average price over the previous 30 accounting periods. So if it is an hourly chart, i.e. where each bar, or "candlestick" represents the price movement of one hour, then the SMA shows the average price of the last 30 hours.

You can tell at a glance from this whether the price has been rising or falling over that period. This in turn shows you what the current "trend" is. If you trade following the "trend", as many successful traders do, then the SMA is your guide.

It's normal to use two SMAs, for example a 5 period and a 30 period, if you're a short term trader, or a 25 period and a 150 period, if you're a long term trader. You then watch out for the shorter period SMA crossing over the longer period SMA, which is often a signal to go long or short, as the case may be. The strongest signal is where the current price goes through both the SMAs at a steep angle.

2. Bollinger Bands

Bollinger Bands are two lines that reflect the volatility of the market, very similar to support and resistance levels. It is frequently found that when the market price touches or goes through one of the two lines that it then tends to return to the middle ground between the two. If the lines are close together it means there is a lack of activity in the market, with little buying and selling. Increased activity causes the lines to spread further apart in the direction the price is moving.

One thing to look out for is where the Bollinger Band lines are close together for a period of time. This indicates a lack of buying and selling, where traders are as yet undecided as to whether the price is too high or too low. Very often, once the price moves through one of the lines there is a strong movement in price in that direction, market activity increases and the lines accordingly move further apart. They are more of a short term indicator.

3. Stochastics

Stochastics uses the moving average principle to determine whether the market is overbought or oversold. The theory is that if the moving average lines are above 70 the market is overbought (which means you should buy) and if they are under 30 the market is oversold (so you should sell, or go short).

4. Relative Strength Index (RSI)

This is similar to stochastics in that it shows if a market is overbought or oversold. It uses the markers of 80 and 20, rather than 70 and 30, but the principle is the same. If your stochastics and RSI indicators agree on an overbought or oversold market then it's a very strong signal to buy or sell, as the case may be.

5. Parabolic Stop And Reversal (SAR)

Everyone would like to buy at the bottom of the market and sell at the top, or go short at the top and long at the bottom. In this case, Parabolic Stop And Reversal is probably the best indicator for spotting reversals in trend. It comes into its own in long term trading. The signal appears on your chart as a series of dots. When the market price crosses the dotted line going up it's a signal to buy, and vice versa.

There are other indicators, and all have their strong points and drawbacks. But your knowledge of these five will help you make a majority of correct decisions on your currency trading account, both for going into the market and coming out with a profit.