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Indicators

So there you are, weapon in hand, tucked away in your foxhole out of the view of the others that are waging war. You see price going up, price going down. And you're looking for your moment when you can run into the battle, take your prize, and return with the spoils of war.

With your binoculars you are out there surveying the field watching the war take place. Remember to always remain neutral in the war. You don't care which side wins. You just want to be on the winning side. So as the war wages on, look to see who's winning. If the bears are, then join them in their battle. Likewise if the bulls are winning, unite in their victory.

There are numerous indicators to assist you in deciphering who is currently winning the battle. An example of that would be a moving average. A moving average is the calculation of a series of points. It's vary common in Forex for the moving average to be based on the closing price of a particular candle or bar. For example, if one is using a 9 MA. They have a line on a chart that is calculating the last 9 candle closings.

To calculate the moving average, you would add up the last night closings and divide them by 9. Likewise, if you were using a 50 MA, you would add the up the last 50 candle closings and divide them by 50. Put that calculator away. Nearly every charting platform out there will automatically calculate whichever moving average you choose and plot it on the chart for you.

The moving average is constantly updating with every new candle closing. And by watching the movement of the moving average, you can see who might be winning the battle between the bulls and the bears.

Bull Market

As shown in the picture above, it is clear that the bulls are in the lead.

Bear Market



And in contrast, this above picture shows how the bears are winning the battle.

It is common for a lot of traders to watch for moving average crosses to confirm which side is winning. In doing so they might place a slower moving average along with a fast moving average on their chart. 

 

Emacross


You may have heard the expression, "Always trade with the trend". You can see how using moving averages can help you determine the trend.

When watching the war between the bulls and the bears, and times you'll see one side tire out. There's only so much force that can be exerted at any given time. So whether the offense got stronger, or the defense weakened, will determine whether price will be moving up or down. Now after any strong offense, you'll find that price will reach a point before it starts to reverse.

There are indicators that can help illustrate these possible reverses by watching when price is overbought or oversold. A stochastic oscillator is such an indicator.

Stochs



With most oscillators, there's generally a level where people determine price to be either overbought or oversold. In the case of stochastic, those levels are 70 & 30. When the indicator rises above 70 or below 30, it is an indication that price might begin to reverse.

Another indicator that can be used in a similar fashion is the Relative Strength Index. The areas to watch for with RSI would be 80 and 20 when looking for overbought or oversold areas.

RSI


It's not always the best idea to just rely on one set of indicators. No one indicator is going to be the key to success. But rather it should help with the overall picture of what's happening in the battlefield to help you make a decision.

Your charting platform will generally provide for you a wide variety of other indicators for use. Play around with each one and see how they work.

The most important part is ending up trading with what you are most comfortable with. Keep in mind; nearly every indicator relies on past information. As a result, if you're creating your entries and exits solely based on their use, one must use discretion. At times you'll find that you have either entered the battlefield a bit too early, or sometimes left a bit too late.

More Lessons

1. Recruit - What is Forex?
2. Private - How does Forex Work?
3. Private First Class - Selecting a Broker
4. Corporal - Pick a Chart, Any Chart
5. Sergeant - The Fundie vs The Techie
6. Lieutenant - Strategize
7. Captain - Indicators
8. Major - Playing with Price Action
9. Colonel - Developing your Plan
10. General - Putting it all Together