An Intern Learns – Technical Indicators
Sometimes we all need a little helping hand. Whether you’re a kid who needs help with their high school science project or a big-time CEO who needs a personal assistant to help with their burgeoning workload – sometimes a little help goes a long way. Trading is no different, and luckily there are tools that can help us in our trading endeavours. I’m going to look at some of these tools today. Whether you’re a day trader or scalping the market on the 5-minute mark, there are tools that can help with your specific needs.
In previous blog posts I discussed technical and fundamental analyses. Just to recap; a technical approach is based on the notion that all the information you need is already evident in the charts themselves, both current position and historical movements. A fundamental approach is based on broader socio-economic data and trends and is heavily influenced by the news. For example, what is happening to a particular country’s economic, social and political environment has an impact on its currency and worth.
Today I’d like to look a little closer at the technical side of things. This kind of trading is particularly useful to traders who like the scalping style as scalpers need to pay close attention to the charts themselves. However a brief caution before I begin – less is more! Even though MahiFX has numerous types of really great tools to use, you don’t want to be using them all together, it’s an information overload and it won’t necessarily be of much help. Remember less is more. You don’t want your chart to look like this:
Your eyes may be a little dazzled with all those bright colours on the charts! But don’t worry we’re going to start slow and discuss the basic ones first to get us going.
Let’s begin with ‘Moving Averages’. This is basically a line that runs with your chart, showing a smoother price movement. As your charts move up and down, by using a moving average you can see a clearer and more distinct trend. This can then assist with your trading. This line is calculated in a very simple way. If you have your chart on a ‘bar’ or ‘candlestick’ setting, each vertical bar will represent one unit of your selected time frame. On MahiFX, if the bar is blue, it means the price has gone up, and red if it has gone down. The highest point of the bar is the highest price at that time period and the lowest point is the lowest price. There are also vertical lines sticking out the side of the bars (or on top of the bar in candlestick view). These indicate opening and closing prices. If the bar is blue and going up, then the top vertical line is closing price and the bottom is the opening price. The opposite applies if it is a red bar and the price is going down.
The moving average is calculated using each unit’s closing price; it’s worked out by adding up all the closing prices and dividing that total by the number of units in the chosen period. The period refers to the time frame you have chosen, for example 7 days, 14 days etc. The longer the time frame, the ‘smoother’ the trend line will appear, i.e. it won’t hug the chart as closely but has straightened out more. This is the simplest kind of moving average and also takes the name SMA – simple moving average. It can help to use two or three SMA lines with different period values. The greater the period value the less up and down the line will appear and can give a much more distinct trend direction.
Another kind of indicator is the Exponential Moving Average, EMA. This follows the same basic concept as the SMA, except that the EMA puts more weight on the more recent bars of the graph. In this way it will more closely follow the chart. Now although this appears to clearly be the better of the two options, both the SMA and the EMA have their own pros and cons. While EMA is quicker to react to a market it can be subject to what’s known as a ‘fake out’. As the EMA moves so quickly, it can seem to be indicating an upcoming break out, but in fact the trend continues as normal. An SMA is more reliable in that it is less prone to fake outs but it is also less reactive to recent market changes and can appear too slow reacting at times.
So from this it does seem difficult to determine which one is better. From my research I would suggest using them in conjunction, or at least separately in equal amounts, so you can get the best of both worlds. Use your moving average line to show the general trend. If the chart is above the MA line, then it will be an up trend, and conversely if the chart is below the MA line the trend is going downwards. Watch out for the fake outs mentioned earlier. Use other tools that I have discussed previously such as support and resistance levels. These too can give a clue to the trend. If you use a SMA and EMA in conjunction, consider setting the SMA at a higher period to give a more overall view of the trend, and then use the EMA to give you a tighter feel of the charts direction.
All of these tools and more are available on the MahiFX platform. Under the analysis view there is an ‘indicators’ tab on the left hand side. Here you will find many different types to use. Remember that less is more and you don’t want to overwhelm your chart with colourful squiggly patterns! In the next blog I will discuss other popular indicators such as the Bollinger Bands.