Indicators are popular tools used by forex traders. These are mathematical calculations based on price action or reflect price action in some form.
Indicators are more frequently used for analysis rather than to be traded directly. They help us filter the market noise, confirm our ideas and highlight areas where we should be placing orders if we want to trade them directly.
However, they can also be used as entry points into trades (i.e., the trader places an order at a specific level, triggering their indicator). There is no right or wrong way of using indicators; it’s all about what works best with your trading style and personality.
This article attempts to briefly explain some common Japanese indicators used throughout Japan (most likely apply only to Japanese forex traders) and give a brief idea of how these indicators work.
Here is a list of the most common Japanese indicators used for analysis:
RSI or Relative Strength Index
This is a standard momentum oscillator that measures the velocity of price movements over a given period. It returns a number that can compare against another moving average to make trading decisions.
In essence, if RSI & 50, it’s probably considered as an uptrend, while RSI & 50 may indicate some downtrend. To enhance this indicator, traders often use multiple settings, such as two standard deviations above and below from its moving average line.
Moving averages are also commonly used with RSI to filter market noise.
Fibonacci levels
These are standard reference points used in technical analysis. You could use them to determine price retracements or extensions in the forex world.
Fibonacci studies could also help us measure risk-reward ratios by calculating how many pips we should target when placing a trade with a set stop loss and profit targets.
Linear Regression Channel
This trend indicator consists of 2 parallel linear lines above and below the current price movement.
If the current price falls between these channels, it suggests that there is no clear direction in the market, so trading decisions could be postponed until either one of these channels gets broken.
Chartists can use Linear Regression Channels to anticipate reversals when prices break through them from top or bottom.
Momentum Oscillator
Another popular momentum oscillator calculates a smooth moving average of a market’s closing prices. It calculates the difference between this average and the actual closing price to show us whether the market is currently overbought or oversold.
In Japan, there are often three different types of Momentum Oscillators used in charting, namely Fast (red), Slow (black) & Full/True Strength Indicators (blue). The blue indicator is closest to actual momentum readings because it hasn’t been smoothed out, unlike its two counterparts.
Price Action:
Price action refers to actual price movements rather than anything derived. For example, candlestick formations are price action studies.
Price action traders tend to be more focused on taking immediate trading decisions without necessarily looking at any indicators.
They may use additional tools such as Fibonacci levels or Pin Bar charts, but this is mainly for risk management purposes rather than to take entry signals.
Japanese Volume Indicator
This indicator calculates the total volume flow of every candle, thus showing us which way price moves are likely to follow through.
For example, if there is a strong uptrend with large volumes on each up candle, chances are it would keep an uptrend going unless some form of resistance was encountered (i.e., break of previous high).
On the other hand, there are weak volume readings throughout an uptrend and several failed attempts at breaking higher highs. The trend is likely to reverse.
Pivot Points
Pivot Points are usually calculated using either High, Low & Close of a market over a given number of periods.
They are very similar to Fibonacci levels except that they are recalculated for every new period.
Thus traders use them rather than Fibonacci levels for quick reference in terms of essential price levels/zones where there could be significant support or resistance waiting.
Japanese Candlestick Charts
Generally speaking, Japanese candlesticks show us whether the price is trading within an uptrend with large white candles (not too close to the previous low) or within a downtrend with small black candles (see attached illustration).
The best way to learn them is by studying different formations in an actual chart.
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