Forex indicators are data points that indicate the direction in which a currency will move. Forex indicators are used extensively by investors to optimize their trading strategies. These indicators are used across timeframes and currency pairs. The right mix of a variety of indicators may help one formulate an effective trading strategy that succeeds in a dynamic and fast-moving currency market.
Forex Indicators: types
Broadly speaking, Forex indicators can be classified into two categories:
Leading technical indicators: These suggest the probability of what is likely to happen in the Forex market with respect to the direction in which a particular currency pair is headed or where a currency pair price would reach.
Lagging technical indicators: These indicators keep traders abreast of what has already happened in the Forex market. These indicators are useful in identifying whether the market is moving sideways or is trending up or down.
Forex Indicator Tools: the ones to look out for
Some of the key Forex indicators are:
Simple Moving Averages (SMA): This indicator tells a trader the average price for a particular time period, for example five minutes, 20 minutes, one day, etc. Each of the chosen periods has the same weight.
Exponential Moving Average (EMA): The averages, under this indictor, are calculated with the recent Forex rates carrying a higher weight in the entire average. This is done in order to obtain a more accurate indication of trend direction.
Relative Strength Index (RSI): It is a price-following oscillator that has a range of 0-100. One of the more frequently used methods of analyzing the RSI is to find a divergence at which the currency price touches a new high, but the RSI is not able to surpass the previous high. This diversion points towards an impending reversal.
Moving Average Convergence/Divergence (MACD): This involves the plotting of two momentum lines. The MACD line is the difference between two exponential moving averages and the trigger/signal line, which is basically an exponential moving average of the difference.
Stochastic Oscillator: This indicates overbought or oversold conditions on a range of 0%-100%. The indicator is based on the occurrence that, in an uptrend, the closing prices for particular periods are concentrated in the top segment of the period’s range. Conversely, in a downtrend, the closing prices are concentrated in the lower segment of the period’s range.
Although this is not an exhaustive read of all the possible Indicator Tools that a forex trader needs to keep track of, these are some of the main ones that would help formulate better trading strategies.