5 Forex technical indicators every trader should know
Forex indicators are deployed to predict price changes in the foreign exchange market. They are used by technical analysts to interpret data and generate buy and sell signals which are suitable for trade. The math behind technical indicators is not complex. It can be something as simple as a moving average, where daily prices are averaged over a specific interval. Traders can use Forex indicators to appreciate the direction or trend of the market. Unfortunately, not all traders include technical indicators in their strategy. Have you ever thought about using Forex indicators in trading? If not, it is time you did. In this article, we will list the technical indicators that work.
1. Bollinger Bands
Bollinger Bands illustrate the highs and lows that a security price has reached, in addition to its relative strength. They are composed of a moving average and two lines mapped out at two standard deviations on one of the sides of the central moving average line. They are practical curves drawn in and around the price structure. John Bollinger was the one who developed this chart indicator. He is an important contributor to the field of technical analysis.
Bollinger Bands tell you what is going on. If the market is quiet, the bands contract. A quiet foreign exchange market can bring many opportunities, but you must act fast. If the market is loud, the bands expand. Bounce trades with the Bollinger Band indicator. If the price reaches the top of the band, sell. On the contrary, if the price hits the bottom of the band, buy. Pay close attention to recent price behavior.
Bollinger Bands measure deviation, so you can easily identify trends. Therefore, you can make buy or sell decisions regarding currency pairs. Being able to recognize trends is a non-negligible skill when it comes to currency trading. Keep it simple and trade with the trend.
2. Exponential moving average
It is not all that different from the simple moving average in the sense that it indicates trade areas, trends, and helps analyze markets. It gives you more information on recent prices. Owing to this unique calculation, it follows prices very close. To calculate an exponential moving average, you have to:
- Determine the SMA for the original EMA value
- Calculate the weighting multiplier
- Determine the EMA for every day between the original EMA value and today
As long as you stay above the exponential moving average, higher prices are to be expected. Nevertheless, if you trade below, you will be in a downtrend. This means that you can expect lower prices. Once you learn how to read the trends, you will trade successfully. If you are afraid, open a demo account with a trustworthy broker. If you would like to trade internationally, you are in luck because there is a list of FX brokers accepting traders from the USA.
Professional traders prefer using this Forex indicator. Why? Probably because the emphasis is placed on recent price action. As time passes, new highs and lows are formed, which are relevant for traders in the market. Monitor primary trends and generate buy/sell signals.
3. Stochastic oscillator
This Forex indicator was created by George Lane in 1950. It is a momentum indicator which uses support and resistance levels. You know when traders in the market buy too much or if prices need to be altered. You know the exact location of the closing price of a security in comparison with the high/low range over a certain time period. Forex traders use this technical indicator in numerous ways. Its main purpose is to highlight where the market conditions are overbought or oversold.
The stochastic oscillator comprises two lines which move together and interact with one another. The Forex indicator will always be between 0 and 100. As a rule, readings over 80 are considered part of the overbought range. Readings under 20 are considered oversold. If the stochastic indicator accelerates all of a sudden into one direction, the bands widen, indicating that a new trend will start. As long as it continues to move in one direction, the trend will remain the same. If the technical indicator is the overbought/oversold area, do not force things.
4. Ichimoku Kinko Hyo
Ichimoku Kinko Hyo represents a set of lines plotted on the chart. This technical indicator was developed to allow professional traders to evaluate aspects like trends, impulse, support, and resistance fast and securely. As the name clearly suggests, it is a Japanese charting method and a technical analysis method. If you use MetaTrader 4, use the Ichimoku Kinko Hyo indicator. It is not necessary to download it separately.
How to work with Ichimoku signals
If the market happens to remain during a sideways trend, the indicator lines are horizontal and the price fluctuates around them. The lines produce signal trends by intersecting each other. It is recommended to open a trading position, without expecting the movement of the foreign exchange market. If the price goes into the cloud, there is no way of telling what will happen. What is more, if the market continues to move in the same direction, you cannot close your position.
MACD is an acronym and it stands for Moving Average Convergence Divergence. Not only is it unbounded, but also it materializes below the price action. You should incorporate this Forex indicator in your trading. Actually, it can work in conjunction with other tools. If you make modifications to the settings, you can build a pretty good intraday trading system. All you have to do is to change the settings to 24, 52, 9. MACD is made up of 3 components, as follows:
- MACD line – It is the fastest line on the indicator. Additionally, it is highly sensitive.
- MACD signal line – It functions as a trigger for buy and sell signals. It reacts fast.
- MACD histogram – It will alert you to imminent signal line crossover in MACD.
You can take advantage of a renowned Awesome Oscillator. Enter and exit the foreign exchange market the moment that you receive a signal from the MACD. Determine the market momentum and calculate your moves.
By Cynthia Madison