Trading indicators represent a significant portion of every trader’s technical strategy. Pairing indicators with the right risk management tools allow you to gain more insight into trends and make better price predictions. In Forex it’s no different, but do you know what is a Forex Trading Indicator?
What is a Forex Trading Indicator?
As a forex trader, it is beneficial to include technical analysis as part of your strategy. Technical analysis in this context means studying a variety of indicators. A trading indicator is a mathematical calculation. Indicators are plotted on price charts as lines, and they help traders identify certain trends and signals in the market.
There are various types of indicators. Leading indicators are forecast signals that predict price movements in the future. Lagging indicators show momentum using past trends.
Top 10 Forex Trading Indicators
1. The Simple Moving Average (SMA)
The moving average (MA) is also the simple moving average (SMA). It is an indicator that we use to identify the direction of a price trend while omitting short-term price spikes’ interference. The SMA combines two price points of an asset over a specific time frame.
The data we use depends on the size of the moving average. For example, a 50-day moving average relies on 50 days of data. The MA indicators help you study levels of support and resistance. You can also study previous price action and determine future trends and patterns.
2. Exponential Moving Average (EMA)
Like the simple moving average, the EMA places greater emphasis on recent data. When uses in cooperation with other indicators, EMAs can help you confirm significant market moves. The most popular EMAs among forex traders are the 12-day and 26-day exponential moving averages for short term analysis and the 50-day and 200-day EMAs to check for long-term trends.
3. Stochastic Oscillator
A stochastic oscillator compares the specific closing time of an asset to its range of prices over time. This indicator shows momentum and trend strength on a scale of 0 to 100. A reading below 20 indicates an oversold market, while a reading above 80 indicates an overbought market.
4. Moving Average Convergence Divergence (MACD)
The MACD indicator detects changes in momentum by comparing two moving averages. MACD indicators help forex traders identify possible to buy and sell opportunities around levels of support and resistance.
Convergence means that two moving averages come together, while divergence means that the moving averages are drifting apart. Converging moving averages indicates decreasing momentum while diverging moving averages represent increasing momentum.
5. Bollinger Bands
A Bollinger Band provides a range within an asset trades. The width of the Bollinger band increases and decreases in reflection or recent volatility. The closer the Bollinger bands are to each other, the narrower they become. Narrow bands indicate low volatility in the financial instrument.
Bollinger bands help forex traders determine whether an asset is trading outside its usual levels. Most traders use Bollinger bands to predict long-term price movements. A price above the band indicates that the asset is overbought while a price below the band indicates the oversold price.
6. Relative Strength Index (RSI)
RSI is an indication of momentum, warning signals, and market conditions. RSI levels are figures between 0 to 100. An RSI of around 70 indicates an overbought market, while figures around 30 indicate an oversold market.
An overbought signal could be a suggestion that short-term gains are reaching a point of maturity, and the asset may be ripe for a price correction.
7. Fibonacci Retracement
This indicator can pinpoint the degree to which a market will drift against its current trend. In trading, a retracement or pullback is an even where the market experiences a temporary dip. Forex traders use the Fibonacci retracement indicator to confirm whether a trend is about to reverse or go through a temporary pullback. This indicator also helps traders identify possible levels of resistance or support. The Fibonacci retracement indicator can advise you where to place your take profit and stop-loss limits.
8. The Ichimoku Cloud
The word “Ichimoku” translates to ‘one look equilibrium chart.’ The Ichimoku Cloud is an indicator that identifies support and resistance levels. This indicator can also estimate price momentum and signals that help traders make decisions.
9. Standard Deviation
Standard deviation is an indicator that helps forex traders measure the sizes of price moves. This indicator can predict how likely volatility is to affect prices in the future. Standard deviation cannot pinpoint whether prices will move up or down, but it can let you know whether prices will be affected by volatility.
10. Average Direction Index (ADX)
The ADX indicator highlights the strength of price trends. The ADX is represented by a figure on a scale of 0 to 100. A reading of more than 25 can be considered a strong trend while below 25 is considered adrift. Forex traders use the ADX indicator to determine whether a trend is likely to continue or reverse.
The ADX relies on data from moving averages. You have the freedom to pick your preferred period. The ADX does not show how a price trend may develop. Instead, it indicates the strength of the trend.
Why Do You Need This List?
Here are some rules of technical analysis:
- Never use one indicator in isolation
- Never use too many indicators at the same time
Focus on a few indicators that you think will work best for your strategy. This list will help you identify the right indicators for your strategy. Utilizing technical indicators means freedom and flexibility. These are two factors that can lead you to success in the forex market.
From a glance, technical indicators may seem intimidating. It is for this reason that MyTrade exists; to educate you on trading in the forex market. Below are some articles that can benefit you: