Forex Indicators That All Traders Must Know
Most seasoned or beginner traders love the challenge of finding the perfect Forex market moment to make their buy or sell move. As fascinating as this search may be, traders know there is no one-size-fits-all recipe to trade the Forex market. In other words, they need to learn and master a wide range of market indicators to tell them when the excellent moment comes for buying or selling Forex cross rates. Forex and dedicated trading platforms use a handful of tools, but today we will focus on 6 of the most important ones!
1. Simple Moving Average (SMA)
Trading by following the trend’s direction is a straightforward approach in Forex trading, which most traders prefer. The SMA indicator reflects the average price (arithmetic mean) for a specific time. The SMA has the purpose of smoothing price movements to highlight a trend.
As you can quickly figure out, the SMA indicator is useful to let us know the direction of a trend, while it is not the best tool to use to receive a warning of a move in advance. The SMA usually operates with two data sets (and sometimes more) – an average calculated over a more extended period (50, 100, or 200 days), and an average calculated over a shorter period (10, 15, or 20 days).
The SMA signals the new trend when the long-term average is moving above or below the short-term average.
As specialists say, the use of indicators and their level of helpfulness depend on plenty of your trading style and psychology. However, the SMA allows you to experiment and learn what works best for you.
2. The Exponential Moving Average (EMA)
Similar to the SMA in signaling the direction of a trend, the EMA relies on prices that are more recent, responding faster to price changes. Popular short-term averages include 12 and 26 days EMAs and long-term averages include 50 to 200 EMAs.
The indicator helps the trader build strategies. One of the most common is to trade each time the two moving averages cross, buying when the shorter MA goes above, the slower MA and selling when the shorter MA goes below, the slower MA.
3. Moving Average Convergence Divergence (MACD)
The previous two indicators show whether the significant trend of a currency pair is going up or down; however, traders need a further method to tell them if the indicators are reliable. In other words, we see the trend, but now we need to confirm it.
The MACD indicator does not generate specific buy or sell signals but allows him to understand if the trend following and the trend confirmation tools and results agree. It is a momentum indicator, as it also tries to measure the strength of the trend.
It relies on the two indicators discussed above, its core-aspect being the divergence calculation between a faster EMA and a slower EMA.
Also or instead of MACD, some traders use the Rate of Change indicator (ROC).
4. The Pivot Point Indicator
The Pivot Point indicator is an essential tool that helps traders calculate support and resistance points. Support and resistance values are crucial to trading, attributes of technical analysis and necessary to chart analyzing patterns. These terms refer to price levels you see on charts that show the tendency of acting like barriers preventing the price to move in a particular direction.
The Pivot Point indicator is a tool helping traders to project crucial support and resistance price levels, as the support and resistance zone offers excellent potential for traders to trade on entry or exit points.
Pivot analysis encompasses many pivot calculations: standard, Fibonacci, or DeMark pivot points. What traders need to keep in mind is that Pivot Point indicators do not make a trading system. They are instruments that help you exploit support and resistance lines better, open positions, and inform your overall trading strategy.
5. Bollinger Bands
The Bollinger Band is a volatility channel and a profit indicator. After thirty years since its invention, it is still one of the best Forex trading tools in existence. The Bollinger Bands indicator uses two parameters:
The number of days belonging to the moving average;
The number of standard deviations of price-data changes over the same period.
The results represent trading “bands” that widen together with volatility increases and narrows together with volatility decreases.
The use of Bollinger Bands allows the trader to gather the following information:
- Whether the trend continues or reverses;
- Periods when the market consolidates;
- Volatility breakouts;
- Potential price targets;
- Market tops or bottoms.
6. Fibonacci Retracement Indicator
A significant component of technical analysis for traders, the Fibonacci Retracement indicator relies not on the Fibonacci sequence per se, but on the mathematical ratios between the numbers in the series.
In Forex technical analysis, traders work with three main Fibonacci ratios: 0.618, 0.382, and 0.236. If you want to explore more regarding the magic of mathematics and the relationship between Fibonacci and Forex, we recommend you extra readings, including those related to the Golden Ratio.
Using Fibonacci retracements and ratios in Forex trading starts from the idea that after a significant price move, the support and resistance lines will attain levels closer to Fibonacci’s ratios. In other words, this is a prediction indicator, signaling price movements before they take place.
This indicator works best together with other similar tools (such as Elliot Waves) for accuracy and safety.
Forex trading is not a walk in the park, especially for beginners. They have to avoid a load of things and learn each day many other things. Indicators are just the first step. Technical analysis and strategy, patience, perfect management of emotions, and high-end Forex tools and platforms go next.