It is possible to trade using only the price chart. But it is also possible to improve the accuracy of opening trades by using the indicators. The indicators are provided by the brokers to make your life as a trader a little bit easier because they are giving the signals to buy or sell.
You will discover there are plenty of indicators to choose from but you should know some are better than the others. Well, the choice will also depend on your preferences, but today I am presenting 5 the most popular indicators that you can come across on the various platforms. Those indicators are widely used amongst digital options traders.
1. The Relative Strength Index
The RSI is one of the momentum oscillators that helps to identify the oversold and overbought areas. The principal is that when the particular instrument is oversold, the price is much below the usual level and is probable to rise in the near future. When the instrument is overbought, the price is above the regular level, thus the prediction is it will soon fall.
Setting up the indicator
You need to open the indicators list, find the RSI and click on it. Then you will see it below the price chart. Usually, there will be three horizontal lines. The most important are those of value 30 and 70 since they are indicating the oversold and overbought zones. You can adjust parameters like a period or colour.
Using the RSI
You need to observe a moving RSI line and notice the areas when it exceeds the 30 or 70 lines. The closer to 0 it is, the more probable the price will reverse and begin to rise. And when the RSI oscillates close to 100, the chances of trend reversal and the price fall are pretty high.
2. The Bollinger Bands
This indicator belongs to the group of volatility-tracking indicators. It is simply showing the periods of low and high volatility. It works best together with some other indicators that are oscillators or trend-following ones.
Setting up the BBands
To set up the indicator you will have to find its name on the list of the indicators on your trading platform. Then you will see the two bands and the middle simple moving average on your chart. You can change the period, deviation and colours.
Using the Bollinger Bands indicator
As it shows only how volatile the market is, you should complement the Bollinger Bands with some other indicator. Together, they will help you to predict future price movements. Consider changing the value of the SMA according to your trades. If you plan on short-term trading, use the SMA with the period 10. For medium-term trading choose the value 20 and for long-term transactions, you should go for 50.
3. The Simple Moving Average
One of the simplest, yet most popular indicators. It consists of one line only and this line follows the trend. It is not always easy to distinguish the trend just from analysing the candlesticks. And the other issue with the trend is that it behaves differently in a medium and a long-term. These are the right occasions to use the SMA.
The Simple Moving Average is often used together with some different types of indicators. Such combinations improve the accuracy of analysis and help to identify the best entry points.
4. The Stochastic Oscillator
This is a very powerful indicator from the oscillators types. The Stochastic does not follow the trend, but instead, is showing the oversold and overbought areas. It also gives the signals like convergence, divergence or crossover.
Setting up the indicator
Once you choose the Stochastic Oscillator from a list provided by your broker, you may change the parameters like %K, %D and m. %K is called ‘slow’ and shows the number of individual periods to use. %D called fast is a moving average of %K. A letter ‘m’ stands for the level of internal smoothing of the %K where 1 means a fast Stochastic and 3 – slow.
Using the Stochastic
The indicator will appear in a new window under the price chart. The two lines are oscillating between 0 and 100 values. You will, however, see lines 20 and 80 instead. They are indicating the oversold and overbought areas. When the Stochastic falls below 20 or above 80, the trend reversal is imminent.
5. The Exponential Moving Average
This is another, next to the SMA, popular moving average tool. When you attach the EMA to your chart you will see one line moving with a trend. The EMA is calculated in a slightly different way than the SMA but the purpose of using it remains the same. It can be complemented with other indicators.
Please note, that the indicators will not do the job for you. They serve as help for a properly prepared trader. In order to use them successfully, you have to get familiar with them and then practice trading with them. Start by choosing the first indicator today and with time add the next one.
Enjoy the trading!