Forex traders use technical indicators to analyze price movements with the aid of historical and current data. Indicators can range from simple to complex, meaning that while some indicators can be used by new forex traders, other complex indicators are often better suited by experienced forex traders.
Indicators, when used correctly, can be used to determine the ideal moment for a trader to buy or sell. It is therefore important that every forex trader understand at least the basics of indicators before they start trading.
In this article, we’ll discuss five technical indicators new traders can start using now – even without a deep background in forex trading.
1. Simple moving average
A simple moving average is an indicator that that incorporates the average closing price of a currency pair over a specified number of time. A 12-day simple moving average means the average of daily closing price over a period of 12 days.
The purpose of a daily moving average is to identify the market trend. It does this because it identifies a signal in the past and provides a signal after a trend begins. A long term average moving above a long term average can signal an uptrend. A long term average moving below a short term average can signal a downtrend.
2. Relative strength index
A relative strength index (RSI) is an oscillator that measures the change of price movements. Relative strength index oscillates from 0 to 100. Forex traders consider 70 as overbought and 30 as oversold. Relative strength indexes are used to identify chart patterns that may not show in underlying charts like double tops and bottoms. RSI is also use to identify support and or resistance.
3. Stochastic indicators
Stochastic indicators measure the momentum of price in a currency pair. The momentum of a currency pair changes before the actual movement happens to a currency pair. Stochastic indicators can be used by forex traders in many ways, but the main use is to identify overbought and oversold conditions in a currency pair. When a stochastic oscillator indicator is above 80, it is could signify an overbought condition while below 20 could signify an oversold condition. Stochastic indicators are easy to master but it takes a lot of practice for new forex traders to fully understand this concept.
4. Parabolic SAR
Parabolic Stop And Reverse (SAR) is different from other indicators mentioned earlier in this article. Instead of identifying where a trend might be about to start, parabolic SAR indicators are used to identify the end of a trend.
Traders use parabolic SAR indicators to determine optimal exit points for open positions. Each point represents a potential reversal. A point which appears below the indicator as an uptrend and above the indicator as a downtrend.
A parabolic stop and reverse indicator only works in trending markets as it gives a misleading signal in ranging sideways markets. It is a little challenging to learn but could be learnt by a new forex trader who puts in the effort.
5. Average True Range
The average true range is used to measure the volatility of price changes in a currency pair. This indicator is used by forex traders to gain a perception of recent historical volatility in order to plan for future changes. The average true range is considered an oscillator because the curve fluctuates between values calculated based on price volatility within a specified period of time. The average true range calculation can be learnt for better understanding by a forex trader. Average true range does not determine a trend, but it enable traders to measure the short term sharp swings of the forex market.
In this article we have taken a closer look at some of the top indicators used by forex traders to determine the the trend, moving average, and volatility of the Forex market. A trader doesn't need to master all the indicators to become an expert in forex trading. A few indicators can provide a real edge in the market, even for beginners.
It is important to note that no indicator is perfect, and the market can at all times move in an unreliable direction. Nevertheless, by getting the hang of indicators you can start to build strategies when you trade. Try them out today with an Exness Demo account.