This step deals with the study of Moving Average and its types, types of oscillators, overbought and oversold conditions. This step discusses the concept and methods of how to benefit from the concept of Moving Average, Oscillators, and Overbought and Oversold conditions.
Moving Average is the simple concept used to forecast future prices of any currency. This concept is also easy to apply and understand. Moving Average can be calculated for the short term periods, intermediate and long term periods. Mistakes are also possible in using this indicator. The two most common mistakes are the use of Moving Average as a leading indicator and using of Moving Average for the very short term period or using hourly Moving Average. So the traders should avoid to use Moving Average as a leading indicator and should not use it for very short term periods say less than 10 days or for hours.
It is easy to understand and simple to use. Simple Moving Average is more useful for the long term period because this indicator displays a smooth chart for the long term period and minimizes the possibility of losses. The calculation of SMA is very simple. The closing prices of the last X periods should be added and then result should be divided by 15 to get SMA. X represents the number of periods and can be selected by the trader or investor according to the requirements. The points where the averages cut each other are called the crossover points. Crossover points should be given more concentration by the Traders and Investors because these points can help to derive some useful conclusion.
EMA Indicator is used to predict the price movement of any currency in future. EMA is similar to SMA except the fact that EMA indicator reacts faster than SMA Indicator to the recent price changes. The reason of the faster reaction of EMA as compared to SMA is the concept of EMA that is different from SMA. EMA as compared to SMA gives more weight to the recent data and less to the older data. EMA strategy should be used if market is following a solid trend because in solid trend more profit earning opportunities are there and should be avoided if market is ranging because heavy losses may be seen.
Oscillators are a type of technical indicator used to give signals of momentum on the chart in the Forex Trading. There are two types of Oscillators, Banded Oscillators and the Centered Oscillators. Banded Oscillators convey different information than the Centered Oscillators.
Overbought conditions arise when buying in the market is saturated and oversold conditions arise when selling in the market is saturated. Overbought condition is favorable for the sellers to close their opened positions and earn profit and oversold condition is favorable for the buyers to open new positions in the hope of earning profit in future. There are many indicators that can signal the Overbought and oversold conditions such as RSI, Stochastic etc.