Technical analysis is a vast subject with nearly limitless facets one can travel into, but the problem most people run into is that they do not even have a good grasp of what the basics are and how to use them. With a few simple techniques applied PROPERLY, you can do some serious damage in whatever market you are trading.
The top 5 technical indicators:
1. Horizontal Lines – Yes, you heard right, just boring old horizontal lines. These are the most overlooked, yet one of the most effective ways to trade in any market. The proper way to use horizontal lines is to see where price has bounced off of in the past. You should be able to see an obvious place to draw a horizontal line for this to work. If you are looking too hard, then it is not there. Once you see an obvious horizontal line then you have to wait until price interacts with that line and then trade accordingly. The most important part here, and with the other indicators, is that price has to interact with the horizontal line. This is the part that most people forget, they believe that since it is approaching a horizontal line of support or resistance that they should trade the other way. The truth is that you have to wait for price action at the horizontal line. (For a detailed article on price action visit my website further down in the article.
2. Round Numbers – These, are de facto horizontal lines. The only difference is that these occur in specific places (i.e. 1.0000, 1.0100, 1.0200 in a currency pair) these are nothing more than strong psychological levels for the people who are participating in the trading. After all traders are the only people who make price move, and whatever psychology is going on in their head, the successful trader must understand.
3. Trend Lines – These are much like horizontal lines, in the fact that they must jump out at you when you look at the chart, but instead of being horizontal, these are slanted, to follow the tops or bottoms of where price was at in the past. These lines are less trustworthy than the plain horizontal lines, but they still work wonders in specific situations. The situations that work the best is where price respects the lines over and over again, and it gives a price action indication when it returns to the line.
4. Moving averages – These are like trend lines, except that they ebb and flow with the price of the instrument. You will often see price respecting these lines and then blowing right through them. Your goal in using these lines is to use price action as an indicator of when price will be respecting the line and when it will not be. That way you can be on the winning side of the trade when price blows right through a moving average, when so many other traders took the opposite position and thought price was going to bounce off.
5. Fibonacci Retracement Lines – These lines are from the famous golden ratio that Fibonacci first derived. These are drawn from the top of a move all the way to the bottom of it. They try to predict where price will run into trouble and possibly reverse back into the original direction of the trend. When coupled with price action, this can be as reliable as any other indicator out there.
If you are still with me until here, you will have noticed I have brought up the topic of price action many times throughout this article. If you are unfamiliar with the term, price action is anything that tells us what price is currently doing, this is usually manifested by candlestick pattern reading but has many different facets to it as well that are beyond the scope of this article. If price is coming down to a horizontal support line and it drops down to it and then pushes back upwards, then which way is price moving? Most people trade right into support when price is moving down, and they have no indication that it will ever reverse, which is just dead wrong. Wait for the price action and always ask yourself “Where is the path of least resistance?”
It is important that we have an objective factor like price to tell us what is about to happen. Why is price objective? It is because it is not open to interpretation. If you ask 10 different traders to draw the trend-line you will likely get 10 different answers, but if you ask 10 different traders what the price is, you will get the exact same answer (if you have an accurate feed that is)
These indicators are all simple, but there is really no need to get any more complicated, if you use them with solid price action, only taking the best setups, you are almost certainly going to become a net-winning trader.