There are so many technical indicators that you can use like the bollinger bands, the relative strength index (RSI), the stochastic, the simple moving averages, the exponential moving averages, the moving average convergence divergence (MACD), the channel commodity index (CCI) and so that you are not sure which is the best one among them. Rather, every day a new technical indicator is hitting the market with the technician who developed that indicator claiming it is the best one. So what is the best technical indicator that one can use in forex trading or for that matter in trading?
So what is the Ultimate Technical Indicator? Well, to tell you the truth, there is one indicator that will always stand above the rest. And that indicator is the price action. You see all these technical indicators are formulas that are applied to the price action to get a trading signal.
Now, in the currency market, there is no absolute price. However, currencies are priced relatively in terms of other currencies. So we may talk of USD priced relative to GBP or Euro priced relative to USD. Now this might be confusing for those traders and investors who have been trading other markets where prices are always absolute.
Now support is the price where buyers step in and start buying en masse. Think of the support as the floor. When you hit a rubber ball on the floor, it bounces back and returns to you. The price action bounces back from the support in the same way.
Resistance is the price where sellers start selling as a crowd. Think of resistance as the ceiling above you. When you throw a ball above, it hits the ceiling and returns. In the same way, when the price action hits the resistance, it bounces down.
You need to understand this that large players like the big banks, hedge funds and the institutional investors trade in a totally different manner as compared to us the small traders. As a small trader, we want to enter and exit all at once since our order size is too small.
But when a hedge fund or a large bank enters the trade, they usually have large order size. They don’t want to move the market and drive the price by too much buying or selling. So they enter the market gradually. In case of a large buyer, it might drive the price high. So instead of placing one single large order, these big players, enter the market gradually.
So they decide upon a price that they think will be suitable for entering the market. When the market hits that price level, these big players enter the market with the buy order. This price level infact becomes the support. Similarly, in case of large sellers, they also avoid selling all at once. They also don’t want to drive down the prices and make a loss. So they also enter the market gradually. This way they can get a reasonable price. The price level that they use to repeatedly enter the market becomes the resistance.