Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit, and order placement decisions.
Further, approximately 85% of all daily forex transactions involve “the majors,” which include the US dollar, yen, euro, British pound, Swiss franc, Canadian dollar, and Australian dollar. The depth and concentration of the market in just seven currencies provides a statistically significant dataset for trend analysis.
Technical indicators work the same way on the currency markets as they do on the equity markets. On the hourly chart of the British pound/US dollar in Figure 1, see how the market followed the trend from point A to point B. This rising trendline — a relatively steep one that indicates the trend will sustain — acts as a significant support level. At point B, price closed below this trendline for at least two consecutive days, suggesting a trend reversal. This support level acts as a barrier that prices are, generally speaking, reluctant to break. When they do break through support, consider it an alert to open a position. Once the support level is broken, it’ll begin to act as a resistance level. Note how after prices fell to about 1.4530 they started moving up, forming another uptrend. In this example, prices never did reach the first trendline, although there were times it seemed as though market participants were attempting to do so. The second upsloping trendline was also broken to the downside. Both breakdown points were good areas to enter a short position. Another example of how trend-following indicators can be applied to intraday price movement is displayed in the hourly chart of the euro/US dollar in Figure 2. During prominent trends, the moving average crossover method worked well. This example used 10- and 40-period moving averages; if you had entered a trade when the 10-period moving average crossed above the 40-period moving average at point 1 and exited the trade at point 2 when the 40- period MA crossed below the 10-period MA, you would have made a very nice profit. These examples show the use of one indicator or technical analysis tool to make trading decisions. Often, you may have to use more than one. The chart of the euro in Figure 3 displays the use of multiple technical indicators as confirming signals. There, you see a divergence between price movement and the movement of the relative strength index (RSI) and moving average convergence/divergence (MACD). While
prices are moving up, the RSI and MACD are moving down. This suggests that prices will move down, and this is confirmed with the trendline break at point 3.
