Warning Signals in Forex Trading

Use of softwares, charting tools might have made trading in forex simpler than ever before. But there is always an element of risk that one increasingly tends to ignore the warning signals the charting tools give out some times crying for attention. If you are alert you can pick-up a signal from literally any chart or an indicator regardless of whether your software is online or desktop application.

In the following paragraphs let us discuss some critical warning signals and ways to pick them up as and when they show.

Overbought Condition
This is a very important warning signal in a trading condition, if not in delivery buyouts. There are a number of ways and indicators that you may look for this signal from. The most common of them is the RSI or the relative Strength Index, William %R or when MACD falls below the signal line. When RSI and W%R are at 20% on the lower side and 80% on the other or beyond these values exit short and long positions.

52 Week High and 52 Week Low
In most of the cases currency prices often fail to breach its own 52 week crest or trough. Not exiting from long positions near the 52 week high peak or from short position near 52 week low could be a fatal mistake unless you have seen other strong fundamental parameter working in the currencies’ favor. The 52 week range theory holds well because as a currency nears its peak or bottom the currency will be either over bought or over sold and at the same time market sentiment weakens thus reversing the trend.

Rate of Change- ROC
The ROC oscillator plots the difference in prices between the current and x days ago. This x number is usually taken as 10 days which gives good signals. As the price rises ROC too rises and when it falls ROC falls too. ROC is plotted across a mean (zero) line and higher or lower the values greater are the chances for the prices to have been over bought or sold and a steep reversal in its trend.

Stochastic oscillator gives signals of warning in many ways: Close short positions when the oscillators are near or below 20% and long positions near or above 80%. But this is pretty simplistic approach, so a forex trader needs to look for price-oscillator divergence also which when occur indicate a strong trend reversal.

Fundamental Changes
Natural calamities, war, governmental policy changes etc render economies weakened and currencies take a jolt as a result.

There are many more warning signals for the taking and a seasoned forex trader will always look for them before she or he enters into a position.


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About Matthew Anderson

Matthew Anderson is a 20 year veteran of the currency market, having worked as a senior trader and analyst at some of the world’s leading international banks. In addition to overseeing fundamental and technical research at Software-FOREX.org, Matthew is involved in the Software-FOREX.org blog and video blog. Matthew has also published numerous articles on short-term trading strategies and risk management.

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