Every day, more than $6.6 trillion gets traded on foreign exchange markets. Simply put, the global forex market is huge. Surprisingly, it still isn’t showing any signs of slowing down. If you’re looking for a new source of income, forex trading something with looking into.
Before you can make your first trade, however, you need to learn the basics. Performing a technical analysis needs to be a part of every trading strategy, whether you’re a forex, commodities, or even a share trader. Today, we’re going to talk about:
- What forex indicators are
- How can you use forex indicators
- What are the best forex indicators every trader should know
Without further ado, let’s see…
What Are Forex Indicators?
The use of technical analysis should be a big part of your trading strategy. Studying various forex indicators is a part of this analysis. Forex indicators are mathematic calculations that are represented as lines on a price chart. They help traders find clues about the direction the market has headed and recognize certain trends.
There are many types of forex indicators out there, however, they mainly fall into two categories:
- Leading indicators
- Lagging indicators
Leading indicators are signals that can be used to predict price movements in the future. Lagging indicators, on the other hand, analyze previous market trends, analyze them, and use them to indicate the momentum of the market.
On a surface level, this should all be clear. However, you’re probably wondering, how do you analyze forex indicators in the first place. Speaking of…
How Do You Use Forex Indicators?
When it comes to using forex indicators, you need to learn how to use them sparingly. You don’t want to use a single forex indicator and then base all of your trading decisions on that. However, you also don’t want to use too many indicators at once. That will only leave you confused and prevent you from making a trading decision.
You need to go through the options and see which indicators are best suited for what you’re trying to achieve with your trading efforts. Moreover, the best forex indicators should also be used alongside your own analysis of the asset price movements over time.
Another important thing to remember is that you need to confirm your forex signal. For example, let’s say that you’re getting “buy” signals from your indicator and “sell” signals for the price movements. If that’s the case, you need to use a different indicator or a different time frame until another factor confirms one of the signals.
The most important thing is to develop a trading plan and stick with it. You must never lose sight of the plan. Come up with a set of trading rules and make sure to follow them every time you’re using forex indicators.
4 Best Forex Indicators Every Trader Needs
How can you pick the best forex indicators for your trading strategy if you’re not familiar with some of the most popular indicators out there? To help you with your selection, we’re going to look at the four forex indicators we feel every trader – no matter the experience – should know.
Just to note: the forex indicators listed below aren’t ranked in no particular order, they’re merely some of the most popular choices among modern forex traders.
The Simple Moving Average
The first indicator, the Simple Moving Average is mainly used to find out in which direction the current price trend is heading without the interference of short-term spikes in price. It combines the price points over a certain time period and then, divides it by the number of data points. This gives you a view of a single trend line. The amount of data you need to use mainly depends on the length of the moving average. Calculating a 100-day SMA requires 100 days of data.
The Exponential Moving Average
Here we have another moving average that’s popular among today’s traders. Unlike the previous average, the Exponential Moving Average puts more emphasis on recent data. This makes it more responsive to the new data. The most popular EMAs are 12 to 26 days long. When combined with other forex indicators, the Exponential Moving Average can help you examine the legitimacy of big market moves and confirm it.
The Stochastic Oscillator
This forex indicator is there to help you compare a strict closing price of a certain asset to a number of different prices over a period of time. The Stochastic Oscillator thus allows you to see the momentum and the trend strength of a given asset. It then shows you its strength on a scale from 0 to 1000. Indicators between 0 and 20 represent an oversold market and indicators between 80 and 100 show an overbought market.
The Moving Average Convergence Divergence
Last but not least, we have the Moving Average Convergence Divergence, also known as MACD. This indicator shows the momentum changes of a certain asset. It accomplishes this by comparing two different moving averages. The term “Convergence” means two averages coming together and “Divergence” means that the averages are moving away from each other. You can use the Moving Average Convergence Divergence to identify buy and sell opportunities in the market.
In the end, what’s the best indicator for forest traders? Is there a single that works for every trading analysis and style? No, there’s not. When doing market analysis, you’ll need to use a few of the best forex indicators to learn what you want and calculate your next move.
Most traders find that the most effective way of identifying trading opportunities is by combining several different forex indicators.
This allows them to see whether or not the current market conditions are suitable to trade. If all of this seems intimidating at first, worry not, you’ll get a hang of it sooner or leather. As with everything, you’ll learn the art of forex trading once you put in enough work.