Buy and Sell Signals

For traders engaged with technical analysis, indicators for buying or selling currency are available. As a matter of fact, there are several indicators which can be used including Stochastics, the Relative Strength Index (RSI), Parabolic SAR, and the Moving Average Convergence Divergence (MACD).  Of course there are less common buy and sell signalssuch as the Directional Movement Index (DMI) which is used to determine the direction of an asset’s price action. For the purpose of this article, however, we will be discussing the first 4 more popular indicators.

Unlike the other 3, MACD is considered as a lagging indicator. It does not tell the trader which direction the trend is likely to move. Instead, it is used to confirm that the trend is already underway. Because it uses actual price movements, the MACD is considered as one on the most reliable buy and sell signal today. It is able to spot short term price movements, as well as “fake outs “ (meaning observed breakouts are not real and is a precedent to further trending). MACDs are composed of 3 lines -  1 is computed using short term moving average and the other using long term moving average – and a histogram. The 3^rd line represents the average of the other 2 lines and is often referred to as the signal line. The decision to buy or sell currency depends on the position of the short term MA compared to the long term MA and the signal line.

The Stochastics tells the trader determine where a trend might end. Through its method of calculation, traders who use this indicator are able to ascertain whether the market is overbought or oversold, which sure signals of a reversal. Stochastics are scaled from 0 to 100. If the lines are above 80, then it means that the market is overbought, and prices are going to fall real soon. On the other hand, if lines are below 20 , the market is oversold and it is a good idea to start buying currency.

Just like Stochastics, Parabolic SAR tells the trader where the trend will end. It places dots on a price chart and will indicate points where reversal can occur.  It is really easy to use. If the dots placed above the candlesticks, then traders should sell. On the other hand, if dots are found below the candles, then it is a buy signal.

The RSI is similar to Stochastics because it is able to determine overbought and oversold conditions of the currency trading market. If the RSI drops below 30, then markets are oversold and traders should start buying currency because there’s a big chance of a reversal. On the other hand, if the RSI is found above 70, then markets are overbought and this is a clear signal to sell.  Unlike the Stochastics, however, the RSI is able to determine trend formations.