Moving Average Convergence Divergence (MACD pronounced Mac Dee) is the difference between the 26 day and 12 day exponential moving averages. A 9 day exponential moving average called the signal line or a trigger line is plotted on top of MACD to show buy/sell opportunities.
Traders use MACD in three well loved ways: Crossover, overbought/oversold conditions and divergences. In wide swinging markets, MACD proves most effective. When MACD falls below the signal line, the basic rule is to sell and when MACD rises above the signal line and cuts it from below, it is a buy signal.
When the shorter moving average pulls away from the longer moving average, it is likely the price is overextended itself. This indicates, it will comeback to the realistic levels soon. MACD is also very useful tool in telling whether the market is overbought or oversold.
An indication that an end to the current trend may occur soon is when MACD diverges from the currency pair. A bearish divergence occurs when MACD is making new lows and the currency price fails to reach those lows. Similarly, a bullish divergence occurs when the MACD is making new highs but the currency price fails to reach those highs.
Momentum is an oscillator that indicates the rate of price change not the actual price level. This oscillator is the net difference between the currency pair closing price and the oldest closing price from the predetermined period. The signal is triggered when the oscillator crosses the zero line. The shorter the number of days included in the calculations, the more responsive the momentum oscillator will be to the small term price fluctuations.
Another vital technical indicator is the Relative Strength Index (RSI) and it indicates a markets current strength or weaknesses depending on where the prices close during a given period. RSI is plotted on a scale of 01-100 and a buy signal is triggered when RSI moves up from the lower band above 30. Similarly, a sell signal is triggered when RSI moves down from the upper band and comes down below a level usually set at 70.
Rate of Change (ROC) is another version of momentum oscillator sometimes used. Instead of subtracting the oldest closing price from the current closing price, the ROC formula divides the current closing price with the oldest closing price.
The Volume Indicator is used to show the strength of an up or down movement. A movement accompanied by an increasing volume is more likely to continue with strength than a movement accompanied with decreasing volume.
Many traders use volume indicator as their only technical indicator in trading. Other traders use it in conjunction with price charts and fundamental analysis like economic news and geopolitical news. It gives entry and exit signals and helps in overall trading. The Volume Indicator is a fantastic source of confirmation. You should learn to use these technical indicators. You should become comfortable in using them. Every trader has his/her own favorite technical indicators. Use them to discern trends on different currency pairs and time intervals.