Three Handy Tools on Your Forex Trading App
For an ice climber, there’s no more pleasant sight than a thick glacier looming over their head. This is their ticket to ascending higher, ultimately summiting, and notching up another career milestone. The problem is that not every glacier can be relied upon to hold their weight, and the potential consequences of getting this judgement wrong are dire – for instance, plummeting to the ground together with a 100-ton ice pillar.
For this reason, climbers have their ways of assessing the sturdiness of an ice slab. If the ice appears blueish, this is a good sign, while whiteness indicates the presence of air bubbles that make the ice less coherent. Climbing too late in the season raises questions because the ice may have started to thaw. And then there’s the risk of avalanches, which only the very experienced climbers know how to sniff out.
A similar predicament faces those who attempt to mount rising prices in the forex market. Prices may indeed be set to continue their upward movement, but it’s also possible that the trend holding them up is shakier than it appears. Planting your pick into that sort of ice could lead to you, very shortly, plunging off a precipice of falling prices, with unpleasant financial results. So, what are the tools in an online trader’s kit to help him gauge the direction and strength of an upcoming trend? Below, we’ll talk about three of the most important ones.
Trading Volume
Just as the mere presence of a glacier doesn’t prove it should be mounted, rising prices in themselves aren’t a good indicator of trend strength. A 2% rise in the EUR/USD looks exactly the same when it comes as the last gasp of bullishness at the end of an uptrend, as when it heralds the end of a major bear run and the breaking of a new dawn for the euro.
In the event the EUR/USD has been trending upward and then pulls back considerably, how can you know that this is just a minor correction, and thus a perfect buying opportunity? One way is by looking at the volume indicator on your forex trading app. If volume comes in weaker on the correction, it shows traders don’t believe very strongly that prices will reverse course. Since trading volume refers to the total number of trades on an asset in a given time period, low volume means fewer people are trading. If lots of traders had changed their viewpoint on the EUR/USD to a bearish one, we would expect them all to jump on the train heading south once it begins moving.
Momentum Indicators
These indicators specialize in detecting overbought conditions – when an asset is due to deflate – and oversold conditions, which surround an asset that’s about to rise. In the event your asset is holding at the bottom of a long downtrend, knowing it’s oversold positions you to open a buy deal and perhaps earn substantially from an upcoming price surge.
How can we know an asset is oversold? One way is by establishing that its recent trend of depreciation has been slowing down. In other words: through recognizing that its downward momentum is weakening. This explains the importance of trading momentum in gauging overbought or oversold conditions.
One powerful momentum indicator is the RSI (relative strength indicator), which you may have already met on your forex trading app. When it sends out readings of less than 30, it means the asset is oversold, and therefore makes for a buy signal. Readings of over 70 indicate overbought conditions, and thus function as a sell signal. In addition, the divergence of the RSI from the actual price trend carries significance for traders. For instance, if prices reach a new high, but RSI falls below its recent trough, you have a sell signal on your hands. You know not to be fooled by rising prices because the new trend in the making is a bearish one, and it won’t be long in coming.
Fibonacci Retracements
In the case when you suspect a price pullback is only temporary, we’ve mentioned you could look at trading volume to confirm your suspicions. Here’s another thing you could do: Use your forex trading app to plot the key Fibonacci ratios – 23.6%, 38.2%, 50%, and 61.8% – on your price chart. Now, let’s say you notice the price correction is slowing down at one of these levels. You have doubly confirmed that prices are due to surge, and may open your buy deal with greater confidence.
This is because rising prices tend to pull back to these key levels when they’re catching their breath for another bull run. Why? There’s no rational reason. History just shows that these ratios repeat themselves significantly in both natural processes and human beings’ trading behaviour. An aspect of the dynamic is a self-fulfilling prophecy because many traders keep their eyes on these levels and act on them, even if in mere expectation that others will do the same. You can use this tool to identify entry points for deals and appropriate stop loss orders. For example, if you buy when prices retrace by 38.2%, you could place your stop loss at 50%, depending on the trading analysis you've completed.
Wrapping Up
You are now familiar with three great tools for assessing the ice into which you’d like to dig your online trading pick. As you gain experience in using them, you are likely to increase your sensitivity to prevailing market conditions, just as the skilled ice climber develops a sixth sense for gauging the safety of an ascent.
When you trade from the iFOREX platform, you will enjoy the facility to employ all these indicators and more in your online trades. Visit the iFOREX website to find out more about their celebrated trading app and the hundreds of assets you can trade from it in CFD form.
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