Forex Indicators are considered to be an essential part of any trader for their technical strategy which helps them understand when they can enter and exit the forex market. An Indicator uses price data, mathematical formulas, graphs, and charts to create a visual Signal. These indicators are widely known as “technical Analysis,” because It uses technical instruments rather than fundamentals.
To thrive as Forex Trader you must be able to understand the technical aspects of the market trend. This is only possible by knowing the use of technical indicators and how they work.
What are the most popular Technical Indicators?
There are thousands of technical indicators which have proven to work for many and vice versa. However, the following are the mostly used and popular trading indicators.
- Moving average (MA)
- Exponential moving average (EMA)
- Stochastic oscillator
- Moving average convergence divergence (MACD)
- Bollinger bands
- Relative strength index (RSI)
- Fibonacci retracement
- Ichimoku cloud
- Standard deviation
- Average directional index
1.Moving Average (MA)
The Moving Average(MA) or Simple Moving Average(SMA) is an indicator used to identify the direction of a current price trend, without the interference of shorter-term price spikes although very much affected by large price spikes. The MA indicator combines price points of a financial instrument over a specified time frame and divides it by the number of data points to present a single trend line.
The data used depends on the length of the MA. For example, a 100-day MA requires 100 days of data. By using the MA indicator, you can study levels of support and resistance and see previous price action (the history of the market). This means you can also determine possible future patterns. MA also helps in realizing the average price movement of the Asset and help understand if it is over priced or under priced.
2.Exponential Moving Average (EMA)
Exponential Moving Average (EMA) is another form of moving average. Unlike the SMA, it is mostly based on recent data points, making data more responsive to new information. EMA can be very helpful in predicting market movement in short time span and it is best used along with other indicators to confirm a the probability of the future price action.
The most popular exponential moving averages are 12- and 26-day EMAs for short-term averages, whereas the 50- and 200-day EMAs are used as long-term trend indicators.
A stochastic oscillator is an indicator that compares a specific closing price of an asset to a range of its prices over time. It shows the momentum and trend strength. It uses a scale of 0 to 100. A reading below 20 generally represents an oversold market and a reading above 80 an overbought market indicating a potential reversal and allowing traders to know weather long or to short the trade .
However, if a strong trend is present, a correction or rally will not necessarily ensue.
4.Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence(MACD) is an indicator that detects changes in momentum by comparing two moving averages. MACD helps to identify possible buy and sell opportunities around certain support and resistance levels.
‘Convergence’ means that two Moving Averages(MAs) are coming together, while ‘divergence’ means that they’re moving away from each other.
If the moving averages lines are converging, it means momentum is decreasing, whereas if the moving averages are diverging, momentum is increasing.
Bollinger Band is an indicator that creates a range within which the price of an asset typically trades. Volatility influences the width of the band. The closer the bands are to each other – or the ‘narrower’ they are – the lower the perceived volatility of the financial instrument. The wider the bands, the higher the perceived volatility.
Bollinger Bands are useful help to recognize when an asset is trading outside of its usual levels also help to predict long term price movements. The movement of price beyond the band boundaries can indicate if they are overbought or oversold.
6.Relative Strength Index (RSI)
Originally developed by J.Welles Wilder, the Relative Strength Index (RSI) measures the ratio of up-moves to down-moves, and equalizes the calculation so that the index is expressed in a range of 0-100.
RSI is a very popular tool for predicting trend reversals at certain point. If the RSI is 70 or greater, the instrument is assumed to be overbought (a situation whereby prices have risen more than market expectations). An RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation in which prices have fallen more than the market expectations).
Fibonacci Retracement is a popular popular indicator to identify certain points of dip or spike of prices in a trend which also provides the prediction of potential short and long term trend reversals. It helps to identify possible levels of support and resistance, which could indicate an upward or downward trend which would help investors understand when to open or close a position.
A retracement is when the market experiences a temporary dip – it is also known as a pullback.
The Ichimoku Cloud, like many other technical indicators helps to identify support and resistance levels. It also estimates the price momentum and provides traders with signals to help them with their decision-making.
The translation of ‘Ichimoku’ is ‘one-look equilibrium chart’ making it an indicator for traders to collect a lot of information from one chart.
Standard deviation is an indicator that helps traders measure the size and variability of price moves. Therefor it is more likely to estimate the volatility affecting the price in the future. It cannot predict whether the price will go up or down, only that it will be affected by volatility.
Standard deviation compares current price movements to historical price movements. Many traders believe that big price moves follow small price moves, and small price moves follow big price moves.
10.Average Directional Index
The ADX illustrates the strength of a price trend. On a scale of 0 to 100, ADX considers a reading of more than 25 as a strong trend, and a number below 25 a drift. Traders can use this information to understand whether an upward or downward trend is likely to continue.
ADX is normally based on a moving average of the price range over 14 days, depending on the frequency that traders prefer.
Note: ADX never shows how a price trend might develop, it simply indicates the strength of the current trend.
Technical Indicators are best used in combination with other indicators. However it should be kept in mind not to be too dependent on one indicators and also being dependent to many can cause confusion while taking decision. That’s why a strategy should be built by a trader for better decision making where the indicators used to give the same BUY/SELL signal most of the times to make traders.