Forex trading is not an exact science. While you can analyse the markets’ history to determine trends, there will always be an element of risk taking. However, tools like forex indicators can help traders choose a good moment to enter or exit a bid. We take a closer look at what forex trading indicators are and a few of the different types that you must know if you plan on trading on the forex market.
Trend Following Tool
The most common and simplest to understand of the trend following tools is the Moving Averages indicator. This tool will measure the average closing price over a predefined number of days and smooth out the data so that traders can clearly see the market trends and tendencies. It is important that traders realise that this is a forex indicator that can help analyse trends, it is not a separate trading system.
Trend Confirmation Tool
Once you have set about analysing trends using your trend following tool, it is a good idea to run through a trend confirmation tool. This will help you see whether or not that your trend following indicator is reliable. One of the most commonly used trend confirmation tools is the Moving Average Convergence Divergence. What this forex indicator does is measures the distance between two moving average lines.
On a forex chart you will see the MACD line and the second line which is called a signal line. When the MACD ine falls below the signal line it is an indication that traders should sell, and conversely when it rises above this is a signal to buy.
Overbought/Oversold Indicator
As you can imagine, if one trader sees that it is a good time to buy into a currency, then there are sure to be a number of other traders around the world thinking the same thing. In this situation you may want to buy in straight away or wait a while until risk is reduced. However, if you choose to wait until this point you may find using a technical forex tool such as an overbought or oversold indicator such as the relative strength indicator quite useful.
The RSI indicator plots the differences between the averages of the closing prices on up days compared with the closing prices on down days for a pre-defined period of time. This is plotted on a graph with a vertical scale of 0 to 100 and is measured in a period between 5 and 25. When it is between 20 and 30 this is a forex indicator to buy as the currency is likely to reach its low for the trend. When it is overbought in the 70 to 80 area, this is forex sell signal as the currency has reached its top.
Profit Taking Tool
Finally traders should use a profit taking tool as this forex indicator will help them determine when is a good time to get the best volume of the profit in a winning trade.
As you can see, using forex indicators is an extremely important part of successful trading.
Bella Gray is a part-time forex trader who recommends practising trading in a metatrader demo account before trading realtime in a forex trading account.