What is the Overlay Chart Indicator?
An overlay chart indicator is a popular technical analysis tool used in the foreign exchange (forex) market. It is a graphical representation of two or more securities or indicators overlaid on top of each other to analyze their relationship and identify trends. Overlay chart indicators are widely used in forex trading to provide traders with valuable insights into the behavior of currency pairs. By combining multiple indicators or securities, overlay chart indicators can help traders to identify potential buy or sell signals, confirm trends, and analyze market volatility.
Overlay Chart Indicator Strategy
Here is an example of a strategy using the overlay chart indicator:
- Choose two or more technical indicators that complement each other. For example, you could use a moving average and a relative strength index (RSI).
- Overlay the indicators on the chart of the currency pair you want to trade. For example, overlay a 20-period simple moving average and a 14-period RSI.
- Look for signals where the indicators confirm each other. For example, if the moving average is trending upwards and the RSI is above 50, this may be a signal to buy the currency pair.
Here is an example of a buy signal for a forex currency pair using the overlay chart indicator:
Currency Pair: EUR/USD
Indicators Used: 50-period moving average and 14-period RSI
- Look for a bullish crossover where the price of the currency pair crosses above the 50-period moving average.
- Confirm the bullish crossover with the RSI crossing above the 50 level.
- Wait for a pullback in the price of the currency pair to the 50-period moving average.
- Look for the RSI to hold above the 50 level during the pullback.
- Buy the currency pair when the price bounces off the 50-period moving average and the RSI remains above 50.
Here is an example of a sell signal for a forex currency pair using the overlay chart indicator:
Currency Pair: USD/JPY
Indicators Used: 200-period moving average and 14-period stochastic oscillator
- Look for a bearish crossover where the price of the currency pair crosses below the 200-period moving average.
- Confirm the bearish crossover with the stochastic oscillator crossing below the 80 level.
- Wait for a pullback in the price of the currency pair to the 200-period moving average.
- Look for the stochastic oscillator to hold below the 80 level during the pullback.
- Sell the currency pair when the price bounces off the 200-period moving average and the stochastic oscillator remains below the 80 level.
Overlay Chart Indicator Pros & Cons
- Overlay chart indicators can provide a visual representation of indicators or securities, making it easier for traders to spot trends and potential buy/sell signals.
- Combining multiple indicators in an overlay chart can help confirm trends and reduce false signals, leading to more accurate trading decisions.
- Overlay chart indicators can be customized to fit a trader’s specific trading style and preferences.
- Overlay chart indicators can be applied to any financial market, including the forex market.
- Overlay chart indicators can be subjective, as different traders may interpret the same chart differently.
- Over-reliance on overlay chart indicators can lead to missed opportunities or false signals, as no indicator is perfect and market conditions can change quickly.
- Overlay chart indicators can be complex and require some technical analysis knowledge to understand and interpret.
- Overlay chart indicators can lag behind the market, as they are based on past price and volume data, rather than current market conditions.
In conclusion, overlay chart indicators can be a powerful tool for forex traders, providing a visual representation and helping to identify trends and potential buy/sell signals. The overlay chart helps the traders confirm trends and reduce false signals, leading to more accurate trading decisions. However, traders should be aware of the limitations and potential pitfalls of using overlay chart indicators, including their subjective nature, potential for missed opportunities or false signals, complexity, and lag behind the market. It is important to use overlay chart indicators appropriately and according to analysis techniques
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