What are the most effective indicators for day trading?
The
first thing to point out is that there is a specific amount of personal bias in
determining the best forex indicators. And this is done by a prism of
experience over anything else, and remember that trading is a personal thing.
But here, it would explain some of the most effective forex indicators.
Repainting
Vs. Non-Repainting Indicators
To
understand better, people reading this need to know the things attached to it.
If someone refers to an indicator as being ‘repainting’ or ‘non-repainting,’ it
indicates whether or not the calculation changes over time. Usually, it
involves taking a calculation that looks back and calculating some kind of
average or oscillation to plot where the market may or may not go.
The
number one problem with a repainting indicator is when it gets skewed over
time. For instance, if the indicator tracks the last twenty candles, that
indicator will be influenced by new candlesticks from the market over time. It
does not really look back at major points in history, nor does it look forward
to the market’s possible behavior.
With
that, one of the biggest problems about repainting indicators is they always
back test well, at least at first glance. If the indicator corrects to fit the
marketplace, then it looks better the longer it runs. But during the moment’s
heat, it does not necessarily mean that the indicator gave all the information
needed. Just like with other indicators, never look at the signal from one
specific indicator as a reason to enter a trade. It’s just a confirmation of
price action hoping to achieve.
Classic
EMA
Though
this might sound a slightly passé, but one of the most efficient indicators is
the humble moving average. Many other traders follow the EMA (exponential
moving average), so it lends a certain amount of credence to its use because a
lot of other people are keeping a close eye to them. Also, it goes somehow
beyond that as it provides an idea of the trend for the time frame being
traded.
Traders
can use an exponential moving average to know the longer-term trend. But they
could also wait when the favorite shorter-term exponential moving average is
lined up with that bigger one.
Relative
Strength Index
The
Relative Strength Index or RSI is an indicator that measures exactly what it
says it does, relative strength. Essentially, it takes the momentum used by
technical analysis practitioners to measure the latest price change in a
currency pair to know if the market is going to be thought of as overbought or
oversold.
Also,
it is an oscillator that shows on the bottom of the chart, with reading from 0
to 100. This exists for about fifty years, and many traders use it in different
time frames.
The
basic idea with this indicator is that trends tend to be a bit overdone at times.
With that, traders must see an occasional reversal if things have become out of
hand. Then, there is the ‘look back period,’ which is typically 14 candles.
Traders could change this, but that number is the standard.
In
addition to that, the RSI will measure the percentage gains during the last 14
candlesticks, measuring an average.
Let’s
say a currency pair has closed 10 of the last 14 days with an average gain
of 1%. The other four days had an average loss of -0.5%. The indicator will
calculate the corresponding figures and plants it on the oscillator below the
chart. Then, the indicator will go up as the number of positive closes
increases along with size, and it would fall when the number and size of losing
candles increase. With a smoothing algorithm, the indicator will determine if
it’s overbought or oversold.
If the
indicator reads more than 70%, the market might become overbought. On the other
hand, if it indicates below 30%, it is in danger of becoming oversold. In this
event, traders may begin to look for opportunities in the opposite direction.
Also,
they might make a profit if they are already in that trend. So, this is a
repainting indicator as it moves its calculation along with the previous 14
candles – that means the next candle will cause the drop of one of the last
candles, and it looks back a static amount of distance.
This
article was submitted by AussieTrust.
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