The use of trading indicators in forex trading should be in every trader’s strategy. When paired with adequate risk management tools, trading indicators give traders a deeper insight into market trends and price changes.
As a forex trader, you can help your trade by using technical analysis to inform your trading decisions. This includes studying different trading indicators. These mathematical analytics include plotting a line on a price chart to help you identify different signals and market trends.
There are numerous different types of trade indicators. These include leading and lagging indicators. With a leading indicator, you can predict future market movements using leading indicators, while lagging indicators help to predict momentum by assessing past trends.
Here are some of the best indicators to consider using in your forex trading strategy.
Simple Moving Average (SMA)
SMA is a forex indicator that helps to predict the possible direction a currency price may take outside the interference of short-term price movements. SMA indicators use price points of forex pairs over a given period and divide this price by the data points to predict an average trend.
The data points used are dependent on the SMA length. For instance, a 100-dau SMA will require using 100 days of market price data. With SMA, you can easily identify support and resistance levels while seeing the price history on the market. This way, you can predict future patterns.
A stochastic oscillator is a forex indicator used to compare specific closing prices of a currency pair to a price range of the pair over a given period to show trend strength and asset momentum on a scale of 0 to 100. Any reading below 20 represents an oversold market, while a reading above 80 indicates an overbought Market.
Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence is a forex trading indicator that compares two moving averages to detect a momentum change. With MACD, traders can identify possible selling and buying points on resistance and support levels.
Convergence means the coming together of two moving averages, while divergence means that two moving averages are moving away from each other. When convergence occurs, it shows a decrease in momentum while a divergence shows an increase.
Bollinger bands are forex trading indicators that give a range in which an asset price trades. Bollinger bands decrease and increase in width to show market volatility. When the bands are too close together, it shows there is low volatility in the market, while a wider band gap shows high volatility.
Bollinger bands can be used to recognize when a currency pair is trading outside its normal levels. They can be used as reliable methods of predicting long-term market price movements. If a commodity price continuously moves outside the higher parameters of a band, it can indicate an overbought market, while a movement below the band shows an oversold market.
Relative Strength Index (RSI)
The relative strength index is a forex indicator used to help a trader identify momentums, signal warnings, and market conditions for unprecedented price movements. Relative strength index is usually in the form of a figure between 0 and 100, where a 70s level represents an overbought market while a 30s level represents an oversold market.
When there is an overbought signal, it means that a trader can achieve short-term gains reaching a point of maturity with pairs in for price correction. On the other hand, an oversold signal means that short-term declined are nearing maturing and a possible pair rally.
The Fibonacci retracement is a forex trading indicator that can be used to pinpoint the extent to which a market is likely to move against a trend. A retracement refers to the temporary dip in the market, also referred to as a pullback.
When traders fell that there is about to be a big market move, they rely on the Fibonacci retracement indicator for confirmation. The Fibonacci retracement can confirm possible support and resistance levels that can indicate trends. By identify9ng support and resistance levels, traders can decide on the best stop and limit points and when to close or open trading positions.
When it comes to trading indicators, the first rule is to never use one indicator on its own or too many of them at a go. From the list above, you can focus on a few indicators that best suit your trading strategy and switch them up to find the perfect combination.