Forex trading can be pretty overwhelming, especially for newbies. That’s why indicators were developed and are used for technical analysis in the market. There are thousands of indicators but using reliable ones is the most beneficial for any trader. There are many popular indicators, such as the Ichimoku indicator, SMAs, Bollinger Bands, OVS, etc. In this article, we will discuss some of the best indicators in this article.
What Are Technical Indicators?
These indicators are mathematical tools used to analyze charts and their properties, such as open price, high, low, closing price, and volume. Technical indicators help traders understand the price movements better and are plotted graphically in charts as chart patterns. And these patterns are indicators and signals used by investors and traders in decision making.
How Does It Work?
Technical indicators focus on historical trading data and use them for technical analysis. Indicators analyze short-term price movements in the market and generate signals to traders that give them an idea of whether to buy or sell. Indicators can also predict future price movement and patterns and are used by many traders to develop their trading strategies.
Types of Technical Indicators
Generally, technical indicators fall into four primary and main types: trend, momentum, volatility, and volume indicators. However, some indicators belong to two groups or types of indicators, so traders’ interpretations on which type these indicators should belong to vary.
To help you better understand how these types of indicators work and differ from each other, here are more details.
Trend Technical Indicators
These are trend-following indicators and are used by many traders since they give optimal chances of succeeding. These indicators were developed to help traders trade according to which currency pairs are trending up or down. Trend indicators help in determining the direction of a trend and whether there is a trend.
Momentum Technical Indicators
These indicators are also called oscillators. They give ideas to traders about the development of the momentum of a particular currency pair. These indicators can also help point out overbought and oversold conditions. And they move in the same direction as the price movement.
When the price goes higher, the oscillators will also move higher and vice versa. They illustrate the magnitude and velocity of a price movement and, when used with a trend indicator, can identify the beginning and end of a trend.
Volatility Technical Indicators
Volatility indicators show how big a currency pair’s upswings and downswings are. They help identify ranges of the movement and its direction, which can be used to predict the future movements of the price. Additionally, a big fluctuation in price equates to high volatility, while little change means the pair has low volatility.
Volume Technical Indicators
This type of indicator shows how much volume of the trades there is in a price movement. However, a volume indicator doesn’t measure the total market volume since the Forex spot is traded over the counter. The volume in a trading platform is from a data stream of brokers, and they can’t represent the total worldwide volume. Still, some traders use these indicators.
Top 5 Forex Technical Indicators
Here are five more of the best Forex indicators a trader must know.
1. Moving Average (MA)
This indicator is used to identify the direction of the current price trend. It combines price points over a specified period and divides them by the number of points to show a single trend line. This is used to indicate who’s controlling the price. If the price is trading above the MA, the buyers are in control. And if the price is trading below MA, the sellers have control.
This is a momentum type of indicator used to identify the overbought and oversold zones. It moves or ranges from 0 to 100. If the price moves above 70, the price has a chance of reversing. Also, if the reading is already more than 80, it indicates an overbought market. But when the price moves below 30, there’s a possibility for a bullish reversal. And readings below 20 indicate an oversold market.
3. Moving Average Convergence/Divergence (MACD)
This detects the changes in momentum using two moving averages and by comparing. Convergence if the averages are coming together and divergence if moving away from each other. If converging, it indicates that the momentum is decreasing. And if diverging, the momentum is increasing.
4. Relative Strength Index (RSI)
This identifies momentum, market condition, and warning signals for price movements. It moves and ranges from 0 to 100 and indicates if the price will likely reverse. More than 70 implies a bearish market reversal and is considered an overbought, while at most 30 indicates a bullish market reversal and an oversold.
5. Average True Range
This indicates a currency pair’s volatility which is essential in knowing the movement of the market. An increase in volatility implies market reversal, while a decrease indicates market continuation. Lower ATR indicates lower volatility, and higher ATR implies higher volatility.
Many technical indicators are beneficial in trading. It’s crucial that you know they exist and how they work so you can use them to develop strategies and help you make proper decisions. Traders use these indicators to their advantage but remember that there are still risks of losses.