In forex trading, traders are constantly tasked with the burden of spending long hours watching the market trends and behaviors with the hopes of finding that perfect time to either sell or buy. Although there is no one sure way to trade in the forex markets, there are various indicators that traders can use to help determine the best time to make their move, either in selling or buying a forex cross rate.
Various Types of Forex Trade Indicators
There are four main types of forex trade indicators, which are grouped according to their functionality.
1. Trend Indicators
Trade indicators help the trader to know the direction of the trend, whether moving up or down. Examples of trade indicators include;
· Moving Average Indicator
Also known as the MA, a moving average indicator is a tool that is used to average the price of a currency pair over a given period. Although there are various moving averages, the most popular ones are simple moving averages and exponential moving averages.
· ADX Indicator
Although average direction index indicators do not show whether the market price is trending up or down, they tell you whether the price is ranging or trending. As such, the ADX indicator is the best filter for trend strategy or range as it ensures that you get to trade based on existing market conditions.
2. Oscillator Indicators
If, as a trader, you are more interested in knowing how the momentum of a specific currency pair is developing, then oscillator indicators are the tools for you. Oscillators will move high when the price treks higher and vice-versa. Examples of oscillator indicators include;
· RSI Indicator
Being the most popular oscillator that traders use, the relative strength index uses the ratio between the average gain and loss over a period of 14 days. The RSI is considered overbought when it goes above 70 and oversold when it goes below 30.
· MACD Indicator
The moving average convergence/divergence indicator works by tracking the difference between the 12 EMA and the 26 EMA. The MACD line, which is the difference between the two EMAs, is then drawn on a sub-chart with a signal line which is a 9 EMA drawn directly on top of it. Here, traders look to buy when the MACD line goes above the signal line and sell when it crosses below the signal line.
3. Volatility Indicators
Volatility indicators measure the upswings and the downswings of a currency pair. High volatility occurs when a currency pair’s price fluctuates wildly up and down and vice-versa. Every trader should be able to tell how volatile a currency pair is before opening a trade. Examples of volatility indicators include;
· Bollinger Bands Indicator
Developed by John Bollinger, the Bollinger bands indicator is used to measure a market’s volatility. Bollinger bands are also used in identifying market conditions such as overbought and oversold.
· ATR Indicator
The Average True Range indicator shows the trader the average distance between the high and low prices over a given time. The ATR indicator is presented in pips such that the higher it gets, the more volatile the pair becomes and vice-versa.
4. Support and Resistance Indicators
The concept of support and resistance refers to the price levels on charts that create barriers to an asset price being pushed in a particular direction. As such, support and resistance indicators are critical to any technical analysis. Examples of support and resistance indicators include;
· Donchian Channels
Also known as price channels, these are lines that appear above or below a recent price action. The price action shows the high and low prices over a prolonged period.
· Pivot Points
Most markets such as forex, equities, and commodities use pivot points. This is because pivot points are designed using a formula composed of high, low, and close prices over a past period. Although prices usually have a hard time breaking through these levels, traders use the lines to determine potential support and resistance levels.
The above-discussed technical indicators can help you as a trader to better understand price action and technical analysis. Although it is usually advised to incorporate different tools for better results, it is important not to complicate your approach by using various indicators at once.