Everything you learn about trading is like a tool that is being
added to your trader's toolbox. Your tools will give you a better chance of
making good trading decisions when you use the right tool at the right time.
Bollinger
Bands.
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Used to measure the market's volatility.
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They act like mini support and resistance levels.
Bollinger
Bounce
·
A strategy that relies on the notion that price tends to always
return to the middle of the Bollinger bands.
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You buy when the price hits the lower Bollinger band.
·
You sell when the price hits the upper Bollinger band.
·
Best used in ranging markets.
Bollinger
Squeeze
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A strategy that is used to catch breakouts early.
·
When the Bollinger bands "squeeze", it means that the
market is very quiet, and a breakout is eminent. Once a breakout occurs, we
enter a trade on whatever side the price makes its breakout.
MACD
·
Used to catch trends early and can also help us spot trend
reversals.
·
It consists of 2 moving averages (1 fast, 1 slow) and vertical
lines called a histogram, which measures the distance between the 2 moving
averages.
·
Contrary to what many people think, the moving average lines are
NOT moving averages of the price. They are moving averages of other moving
averages.
·
MACD's downfall is its lag because it uses so many moving
averages.
·
One way to use MACD is to wait for the fast line to "cross over"
or "cross under" the slow line and enter the trade accordingly
because it signals a new trend.
Parabolic
SAR
·
This indicator is made to spot trend reversals, hence the name
Parabolic Stop And Reversal (SAR).
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This is the easiest indicator to interpret because it only gives
bullish and bearish signals.
·
When the dots are above the candles, it is a sell signal.
·
When the dots are below the candles, it is a buy signal.
·
These are best used in trending markets that consist of long
rallies and downturns.
Stochastic
·
Used to indicate overbought and oversold conditions.
·
When the moving average lines are above 80, it means that the
market is overbought and we should look to sell.
·
When the moving average lines are below 20, it means that the
market is oversold and we should look to buy.
Relative Strength Index (RSI)
·
Similar to the stochastic in that it indicates overbought and
oversold conditions.
·
When RSI is above 70, it means that the market is overbought and
we should look to sell.
·
When RSI is below 30, it means that the market is oversold and we
should look to buy.
·
RSI can also be used to confirm trend formations. If you think a
trend is forming, wait for RSI to go above or below 50 (depending on if you're
looking at an uptrend or downtrend) before you enter a trade.
Average
Directional Index (ADX)
·
The ADX calculates the potential strength of a trend.
·
It fluctuates from 0 to 100, with readings below 20 indicating a
weak trend and readings above 50 signaling a strong trend.
·
ADX can be used as confirmation whether the pair could possibly
continue in its current trend or not.
·
ADX can also be used to determine when one should close a trade
early. For instance, when ADX starts to slide below 50, it indicates that the
current trend is possibly losing steam.
Ichimoku
Kinko Hyo
·
Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price
momentum and determines future areas of support and resistance.
·
Ichimoku translates
to "a glance", kinko means "equilibrium", while hyo is Japanese for "chart".
Putting that all together, the phrase ichimoku kinko hyo stands for "a
glance at a chart in equilibrium."
·
If the price is above the Senkou span, the top line serves as the
first support level while the bottom line serves as the second support level.
If the price is below the Senkou span, the bottom line forms the first
resistance level while the top line is the second resistance level.
·
The Kijun Sen acts as an indicator of future price movement. If
the price is higher than the blue line, it could continue to climb higher. If
the price is below the blue line, it could keep dropping.
·
The Tenkan Sen is an indicator of the market trend. If the red
line is moving up or down, it indicates that the market is trending. If it
moves horizontally, it signals that the market is ranging.
·
The Chikou Span is the lagging line. If the Chikou line crosses
the price in the bottom-up direction, that's a buy signal. If the green line
crosses the price from the top-down, that's a sell signal.
Each
indicator has its imperfections. This is why traders combine many different
indicators to "screen" each other. As you progress through your
trading career, you will learn which indicators you like the best and can
combine them in a way that fits your trading style.