This is a Guest Post by Damien Troy.
To those well versed in the trading industry, it’s a commonly known fact that Forex trading can be difficult to navigate. In fact, it’s one of the most difficult trades in the market for those looking to make consistent and profitable returns, and for those only just making a start in Forex trading, this difficulty can be a complete turn-off. However, traders across the globe are making worthwhile returns and making it look easy in the process. The question is, however, how do they do it? The use of indicators within Forex markets could very well be the answer, but for those with limited knowledge of what these are, it can seem confusing at first glance.
Forex indicators are designed to pick out patterns in the Forex market despite its irregular and almost irrational behaviors. Behaviors tend to repeat themselves within the Forex market, and an indicator can make it easier than ever to pick out the best times to get in and trade. With that in mind, you may be wondering how to get started with technical indicators, and just which ones are the best on the market. We’re here to give you the answers you need.
What Kinds Of Forex Indicators Are There?
Before you come to learn about the best technical indicators in the Forex market, it’s important that you understand exactly what kind of indicators there are out there, and how they can help you when you come to trading. There are four main types of forex indicator, in which we’ve explored each in more depth below:
It is widely argued that all Forex traders should only ever trade with the current trends. Therefore, when it comes to actually determining price trends between any given pair of currencies, there are plenty of indicators available that are designed to indicate these current trends. It is arguably simple to work out price trends without an indicator, but with indicators this can be expanded further. Many traders will use the simple and exponential moving averages, but with alternate indicators you will be informed of changes in trend in good time to give you the perfect opportunity to jump in at the start!
Momentum indicators are the perfect way to not only keep track of long periods of upwards or downwards trends between currencies, but it can also help indicate just how strong a particular trend is at any one time. Stochastics is a good example of a momentum indicator, which will often oscillate between overbought to oversold as the price changes. However, it’s important to note that these indicators aren’t always reliable as they generally only indicate when a trend is beginning to run out of momentum and could be able to reverse.
Stock traders are most likely to find volume indicators useful, as finding volume data for any single pair of currencies can be a difficult process. However, if you do happen to want to see the volume of any particular currency pair, you’ll need to do some research into how to find the right forex broker to ensure you find one that not only publishes volume data, but has the indicators to keep up with it.
It’s no secret that volatility within trading is an important thing to keep up with, and this is no exception in Forex trading. Any pair of currencies can be volatile at any given time due to a whole array of external factors, but a volatility indicator can help you keep track of this. While the volatility of a currency can seem obvious at times, this isn’t always the case, and a volatility indicator will make keeping track at any one time much easier.
Here Are Some Of The Best…
Even though we just discussed that there are four types of indicator, there are two more categories that we need to discuss: leading and lagging. Whether a technical indicator is leading or lagging depends on the time in which it provides the signal, and we’re exploring a little deeper into what this means:
Leading indicators will give you signals in advance when it comes to the trends that you are following. By using a leading indicator, you could find yourself ahead of the market. There is a high chance that you will reach false signals along the way, and so it may be worth investing in more than one indicator to help rule out fake signals where possible. Two of the leading indicators that you could try are:
Created by George Lane in the late 1950’s, the Stochastics indicator is primarily used to determine momentum, and overbought or oversold conditions within the Forex market. When using the indicator, you’ll be greeted by two lines on their char, which will move together and are likely to interact with each other along the way, and with the upper (overbought) and lower (oversold) sections making it easy to see the conditions of the market, it truly is simple to use once you know what to look for! An ‘oversold’ signal suggests that the market could be due for a rebound, whereas an ‘overbought’ gives an indication that it currency prices could be due for correction,
Relative Strength Index (RSI)
Similar to the Stochastic indicator, RSI provides overbought and oversold signals, but this indicator only has one line. In the same way as Stochastic, the RSI indicator has an upper and lower section and where the line rests on the chart indicates whether the market is being oversold or overbought. The single-line design of this oscillator could be simpler for beginners, but arguably provides less information. By comparing different Forex brokers to find one that allows you to use these two together, however, could prove useful in avoiding false signals!
Lagging indicators do exactly what the name suggests – they lag. The signals come after the trend changes, and are more like a confirmation than a suggestion or forecast. The biggest advantage here, of course, is the fact that false signals are less likely, however you don’t gain the advantage of entering the market before the trend begins.
Average Directional Index (ADX)
The Average Directional Index, or ADX, is used for trend analysis through showing how strong or reliable a trend currently is. However, it’s important to note that ADX does not show trend direction, instead it focuses on the strength of a trend at any one time. However, despite the shortcomings in a lack of trend direction, it’s still widely thought of as one of the best on the market.
Bollinger Bands is a technical indicator that primarily focuses on price volatility. The simple moving average can be found in the middle, with upper and lower bands that are used as support and resistance levels. When the two bands are close, volatility is low – and vice versa. This can take some time to get used to, but the detail of this indicator makes it one of the best on the market for those wanting to track currency volatility.
Hopefully this has given you some insight into the world of technical indicators in the Forex markets, and just how each of them can aid you in trading. Keeping up with the markets can seem like a full-time job, but to make worthwhile profit from your Forex trading, it can be well worth the effort. With these technical indicators to aid you in your trading, you can be pulling in returns in no time.
This has been a guest post by Damien Troy who is an experienced and notable author, who loves taking on new challenges and writing across a huge range of topics -channeling his personal experience and expertise. When Troy isn’t tapping away at his keyboard, creating his latest masterpiece, he can be found exploring new countries and cultures or burying his head in a good book.