Technical Indicators in Forex Trading
Technical indicators are tools used in forex chart analysis that give you, the trader, a better understanding of price movements and when it is best to make moves. Different technical indicator tools can be used to analyze price trends, measure volatility, price averages, and so much more.
Technical indicators for trading forex come in four main types. These are oscillators, trend following, support/resistance, and volatility. Each type is grouped based on its function, which can be anything from the ability to reveal currency pairs price averages over time to giving the trader an idea of the current support/resistance levels.
Trend indicators, or trend-following indicators, are used by traders to trade currency pairs on an upward or downward trend. As it is commonly said in forex trading, the trend is your friend, and using a trend indicator makes it easier to read the direction of a trend or even whether a trend exists. Commonly used trending indicators include:
This is a trend indicator that looks more complicated than it is. Meant to be a standalone indicator, Ichimoku shows the support and resistance levels, current currency pair trends and tells you when a trend is likely to change direction.
ADX (Average Direct Index) indicator
ADX indicator does not tell the trader when a currency pair is on an upward or downward trend. However, it shows when a currency pair price is ranging or trending. For this reason, ADX is the perfect filter for trend or range strategies since it ensures your trade is in line with real-time market conditions.
MA (Moving Average) indicator
MA is a technical tool for trading forex used to average the price of a currency pair in a given period. MA gives a chart a smoothing effect, giving a better idea of whether a currency pair is moving sideways, up, or down. You can choose from a wide range of moving averages with exponential moving averages and simple moving averages as the most popularly used options.
A trading oscillator is a tool that gives you an idea of the developing momentum on different currency pairs. Whenever pair prices move upwards, oscillators move upwards too and vice versa. When an oscillator reaches an extreme overbought or oversold level, it is often wise for a trader to find ways to return to the mean.
Even on these extreme levels, an oscillator can remain in position for a long time. Therefore, the trader needs to know how to look for valid signs before making a move. Types of forex trading oscillators include:
With this oscillator, the traders track the distance of a currency pair price from the lowest dip of a given number of times. This is a different method of calculating price oscillation where the difference between the low and high price in the same period is used to divide the distance. This creates a line percentage-K, which is used to determine a moving average marked percentage-D placed above the percentage-K.
Relative strength index (RSI) oscillator
This is the most commonly used oscillator to signal traders when to make forex trading moves. The strength index is bound between zero and one hundred, with overbought level falling above 70 and oversold levels falling below 30. Most traders look to sell whenever the chart moves over the 70 level and buy when the 30 level is crossed from below.
Volatility is used to refer of the size of a trade’s upswings or downswings. A currency pair is said to be volatile when it shows major fluctuations in up and downtrends. When a currency pair does not fluctuate much, it is referred to as a low volatile pair. Before opening a currency trade, it is important to check for volatility. Forex trading volatility indicators include:
Bollinger bands indicators
Bollinger bands volatility indicators print three lines above the price chart where the middle band represents a 20-period SMA, while the other two bands represent standard deviation against the 20-SMA. The outer bands expand to match the volatility of a currency pair.
Support and resistance indicators
Technical forex trading analysis depends heavily on support/resistance levels, which form barriers on pair price levels whenever the pair price is pushed in a given chart direction.
Understanding technical indicators in forex trading is the best way to enhance technical analysis in trading. With the options above, you can choose the best indicator for your needs to maximize your trading potential.