Technical analysis is a must if you’re serious with Forex trading. But to properly perform it and trade efficiently, you need the right tools – technical indicators.
Nowadays, these indicators are essential parts of trading. They help traders understand the market and how it’s moving. To fully comprehend and make effective trading strategies, you need to choose the indicators that work well with you.
Overview: Types of Technical Indicators
There are four primary types of technical indicators: volume, trend, momentum, and volatility. These categories encompass more indicators. To remind you once again what they are, here are brief descriptions for each:
- Momentum indicators – measure the strength of a price movement through calculating magnitude and velocity.
- Trend indicators – identify trends in the market, uptrend or downtrend, and send signals when to buy and sell.
- Volatility indicators – shows how volatile the market is by how big the swings are with the price movements.
- Volume indicators – shows the volume of trades behind a specific price movement.
Top 7 Technical Indicators for Forex Trading
Here are seven of the best indicators you should try using:
Moving Average (MA)
This is a trend indicator and is also called the Simple Moving Average (SMA). MA is an indicator that can identify what direction the current price trend will move without shorter-term price spikes interfering. It makes it easy for traders to locate opportunities in these directions.
MA combines price points over a specified period, divides them by the number of data points, and presents them in a single trend line. Basically, it shows the average price over a chosen time period. It follows the price movement. It’s inferred that if the price is trading above MA, buyers control the price, while sellers control it if it’s below MA.
2. Moving Average Convergence Divergence (MACD)
Despite the presence of the term “moving average” in its name, unlike the first one in the list, MACD is a momentum indicator. It measures the strength of the market. Like many other indicators, MACD is widely used in the global Forex market. For instance, many traders are using MACD in Malaysia and other countries.
MACD detects momentum changes through a comparison of two moving averages. There’s convergence if the two moving averages are coming and moving towards each other, while it’s divergence if they move away. When these MAs are converging, momentum decreases. If they’re diverging, momentum is increasing.
3. Relative Strength Index (RSI)
This is another oscillator that identifies momentum, market conditions, and signals for dangerous price movements. Additionally, it also helps in determining overbought and oversold conditions. A range from 0 to 100 represents this indicator.
Based on the levels, you can determine whether there’s a chance of price reversal. Around and above 70 represents an overbought, while near and below 30 is an oversold. Similarly, when the price moves above 70, there’s a bearish market reversal, while it’s a bullish reversal if it moves below 30. Some traders even have a rule they follow: go long when it crosses above 30 and go short if it crosses below 70.
4. Bollinger Bands
This is a volatility indicator that provides a range of values within which the price usually trades. The width of this range or band reflects volatility. The closer or narrower the bands, the lower the perceived volatility. At the same time, the wider, the higher volatility.
Bollinger bands help determine whether the pair is trading outside its usual levels and help predict long-term price movements. Coincidentally, the upper and lower line in the indicator works as support and resistance levels.
This is one of the most popular momentum indicators and is mainly used to identify overbought and oversold. Additionally, it compares specific closing prices to a range of prices over time to show the strength of the trend and show momentum. Stochastic oscillators also use a scale of 0 to 100. A reading above 80 means an overbought market, while below 20 means oversold.
6. Fibonacci Retracement
This pinpoints the degree to which a market will move against the current trend. A retracement is when there’s a temporary dip in the market, a pullback. Basically, a Fibonacci retracement is like a method to confirm if the market is about to make a move.
Fibonacci helps identify potential support and resistance levels which can indicate upward and downward trends. Since you can identify them, this can help you apply stops and limits and when to open and close positions.
7. Parabolic SAR
Parabolic Stop And Reverse (SAR) indicate the trend of a currency. Specifically, it is used to identify trend direction and potential reversal points. This is an unconventional oscillator and an attempt to show if a market is overbought or oversold.
In PSAR, if the price is above the indicator, there’s an overall bullish trend. It’s an overall bearish trend if it’s below the SAR.
Indicators help you understand the market better. But since there are many available, what should you choose? If you’re unsure what to use, you can try the most popular and the best-proven indicators since they’ve already demonstrated their effectiveness. Each has its own function, and over time, you’ll be able to trade and develop your own strategies.