When trading in foreign exchange, what technical indicators do you need to analyze? What are the advantages and disadvantages of different technical indicators?

First, what are technical indicators?

Technical indicators refer to a certain indicator value or graph curve generated by a computer system using complex mathematical formulas or quantitative models according to specific statistical methods. The technical indicator analysis method we often say refers to the method of using technical indicators to judge the trend of currency pairs. These methods are all prediction methods summarized by people using mathematical statistics principles on the basis of studying historical data.

Second, the application rules of the technical index analysis method

Deviations, crossovers, highs and lows, hovers, reversals, and blind spots in technical indicators are all common applications.

III. Common and important technical indicators

1. Moving Average - MA

A moving average is a statistical process that connects the average of the exchange rate for several consecutive days into a trend line to observe the trend of the exchange rate. We study three situations in the MA time: short-term (5 or 10 days) as long as the price does not break this line, short-term traders can continue to hold; medium-term (20 or 60 days) as long as the price does not break this line, mid-term traders can continue to hold; long-term (200 days) only when the exchange rate stands above the 200-day moving average for a long time, is their long period; when below the moving average, the opposite is true.

It depends on whether the short-term to medium-term, medium-term to long-term cross of the moving average is upward or downward. The upward cross is commonly known as the "golden cross", and the trend is mostly upward; the downward cross is commonly known as the "dead cross", and the trend is mostly downward. The three-line cross is lagging behind the two-line cross, but it is more stable and accurate.

Advantages of the MA indicator:

(1) Moving averages can display buy and sell signals. If the exchange rate breaks through the moving average downward, it is a sell signal; conversely, if the exchange rate breaks through the moving average upward, it is a buy signal.

(2) Moving averages provide a visual indication of the general direction of price movement.

Disadvantages of the MA indicator:

(1) When the market is in consolidation, moving averages frequently send buy and sell signals. It is easy to mislead traders at this time.

(2) Moving averages move slowly, making it difficult to grasp the peaks and troughs of exchange rates. This is particularly true for long-term moving averages.

(3) It is difficult for traders to make buying and selling decisions based solely on the buying and selling signals of moving averages, usually relying on the assistance of other technical indicators.

2. Smooth moving average convergence and divergence - MACD

The MACD indicator is a medium and long-term indicator, and its design idea reflects whether the trend is coordinated or not. Although the information of this indicator is relatively lagging behind the market, it is very valuable for analysis. The indicator mainly uses two long-term and short-term smooth averages to calculate the difference between the two. It removes the false signals that often appear in the MA indicator and retains the advantages of MA. MACD can be used with RSI (Relative Strength Index) and KDJ (Random Index) to make up for their respective shortcomings.

In the MACD indicator, you can observe the changes in the red and green columns. The red line is located above the zero line, which belongs to the long market; the green line is located below the zero line, which belongs to the short market; when the red line starts to shorten, it is a sell signal; when the green line starts to shorten, it is a buy signal.

Bottom divergence: When the exchange rate has seen two to three recent lows, and the MACD does not cooperate with a new low, it is a bottom divergence phenomenon and can be used as a buying signal.

Top divergence: When the exchange rate has two to three recent highs, and the MACD does not cooperate with the new high, it is a bottom divergence phenomenon and can be used as a sell signal.

When there is a second downward cross at a high level, the exchange rate will often fall sharply; when there is a second downward cross at a low level, the exchange rate will often rise sharply.

3. Relative Strength Index - RSI

The Relative Strength Index is a technical indicator that compares the average closing gains and losses over N days to determine the market trend these days. In our commonly used software, you can choose the system default day number 6 or 12, but the time interval between these two RSI values is too short to make much sense to switch.

When we judge the strength of the indicator, the more important nodes are the 10, 20, 50, 80, and 90 lines. When the RSI is below the 10 line, it indicates that the market is in an extremely oversold state, which is a buying signal. When the RSI is below the 20 line, it indicates that the market is oversold. When the relative strength indicator breaks through the 50 line, it indicates that the exchange rate is moving upward. When the relative strength indicator rises to the 80 line, it indicates that the upward trend is strong. If it is above the 90 line, it is in an extremely overbought state, which releases a selling signal.

How to do it? If the exchange rate hits a new high, but the RSI value does not hit a new high, it should be sold as a top deviation; conversely, if the exchange rate hits a new low, but the RSI value does not hit a new low, it should be bought as a bottom deviation. Of course, it usually takes several times for a divergence to get a positive buy and sell signal.

The design of the RSI indicator reflects force and acceleration, but there are also problems with passivation and parameter setting, and the RSI indicator is too fast and too advanced. You say force! The market pushes up, it does need force and acceleration to maintain the angle of travel, but this is a natural situation. What if there is a chip lock and the market's willingness to trade is unprecedented? It has no force, but the market still pushes up, and it pushes faster and faster. Physically speaking, there is no resistance, and uniform motion is the same as stillness. In financial marekt, resistance is the opposite of the market. So there are times when the RSI indicator also goes wrong.

4. Stochastic indicator - KDJ

The stochastic indicator KDJ generally calculates the immature random value RSV of the last calculation period by calculating the price proportional relationship of a certain period according to the principle of statistics, and then calculates the K value, D value and J value according to the method of smoothing the moving average, and draws a graph to facilitate the judgment of the exchange rate trend. Usually this period is 9 days or 9 weeks; in the KDJ indicator, the value range of K value and D value is 0-100. Usually in terms of sensitivity, the J value is the strongest, the D value is the slowest, and the security is the opposite. The J value is the worst, and the D value is the most stable.

According to the value of KDJ, it can be divided into several areas, namely overbought area, oversold area and wandering area. According to the general classification standard, the three values of K, D, and J below 20 are oversold areas, which are buy signals; the three values of K, D, and J above 80 are overbought areas, which are sell signals; the three values of K, D, and J are hovering areas between 20 and 80, which should be waited and seen. Generally speaking, when the three values of K, D, and J are around 50, it means that the power of the long and the short sides is balanced; when the three values of K, D, and J are all greater than 50, it means that the power of multiple parties is dominant; when the three values of K, D, and J are less than 50, it means that the power of the empty side is dominant.

Stochastic indicator:

(1) The stochastic indicator is a short-term indicator with a more comprehensive analysis, but it is more complex than the strength index.

(2) The typical divergence accuracy of stochastic indicators is quite high, and the best buying and selling point can also be found through the intersection of two curves. Stochastic indicators are a highly operational technical analysis tool.

As a veteran foreign exchange trader said: The design idea of the commonly used indicator KDJ borrows the concept of space in physics. Objects fall naturally at the top, and will naturally rebound at the low level. This sounds like that, but there are problems in detail. First, why must it fall at a high level? Can't he blunt the high level? As long as the force is strong enough, the spaceship can leave the earth. In financial marekt, as long as the driving force is large, KDJ can always hover at a high level. If you sell according to the high level of the indicator, this is good, and it's all over. Therefore, the market has entered a strong zone. This indicator is not very easy to use, or it should be used in reverse. KDJ works in the normal market, but it is useful in the balanced market, the shock market, and the sorting market. If it is placed in the unilateral market, problems will arise.

5. Bollinger Band

The Bollinger Barrier is a very practical technical indicator designed according to the standard deviation principle in statistics. It consists of three track lines, of which the upper and lower lines can be regarded as the pressure line and the support line of the price respectively. Between the two lines is a price average line. Generally, the price line travels in a band-shaped range composed of upper and lower tracks, and automatically adjusts the position of the track with the change of the price. When the band narrows, intense price fluctuations may occur immediately; if the high and low points cross the edge line of the band and immediately return to the band, there will be a backshift.

6. Homeopathic indicator - CCI

The full name of CCI Commodity Channel Index is created by Donald R. Lambert. This indicator applies to both futures commodities and stock prices. It mainly measures variability outside the normal range of prices.

When the CCI index breaks through the + 100 antenna from the bottom up, it is an opportunity to seize the opportunity.

When the CCI index falls below the antenna from above the + 100 antenna from top to bottom, it is an opportunity to accelerate short selling.

When the CCI indicator is in the normal zone, you can refer to other indicators for decision-making, but when the CCI falls below -100, you should resolutely sell.

Disadvantages of the CCI indicator: CCI is only used for breaking market conditions, and this indicator should be avoided for mild market conditions.

7. Good separation rate - BIAS

The obedience rate represents the gap between the closing price of a stock and the moving average for the day. The larger the positive obedience rate, the greater the short-term profit, the higher the probability of profit taking; the larger the negative obedience rate, the higher the probability of short covering. According to the gap between the closing price of a stock and the average price of different days, different BIAS lines can be drawn. Parameters: The system draws three BIAS lines, which are the difference between the closing price and the moving average price of L1, L2, and L3.

8. Directional Movement Index - DMI

DMI Chinese name Directional Movement Index, is a rather commonly used indicator. Its basic usage is to look at + DI and -DI cross. + DI crosses from bottom to top - DI, which is a buy signal; + DI crosses down - DI is a sell signal. ADX below 20, indicating that the stock price is in a consolidation period and should be left on the sidelines; ADX breaks through 20-30 and climbs up, there will be a considerable period of ups and downs; ADX is above 50, and suddenly turns downward. Whether it is up or down at this time, it indicates that the market is about to reverse. Parameters: N statistical days; M interval days, generally 14, 6. The ADXR line is the average value of the ADX value on the day and the ADX value before M day.

IV. How to choose the right technical indicators for foreign exchange trading?

There are many types of foreign exchange technical indicators, and the above list only lists the commonly used ones. Of course, different technical indicators have different functions, and each has its own advantages and disadvantages. When choosing which technical analysis indicators to use, we should not use rigid methods. It is necessary to understand that each technical indicator has limitations. We must make specific analysis and judgments based on factors such as the market atmosphere and fundamentals at that time.