Forex trading is an art and it is important that a trader use the appropriate strategy to increase the likelihood of their trades being successful. To accomplish their goal of successful trading traders use indicators which are statistical tools that allow them to make sound decisions about which direction a currency pair price action is headed.
There are numerous indicators which the trader has access to including confirming indicators, leading indicators as well as lagging indicators etc. Some of the more popular trading indicators are relative strength index (RSI), average true range (ATR) and moving averages (MA). Again, the purpose of the indicator is to fit the strategy that the trader is using like a glove fits their hand.
The moving average indicator is one of the more powerful indicators used by traders. A simple moving average is an indicator which helps determine market sentiment. The simple moving average allows traders to compare the current market closings to previous ones over a specified period of time. So, if the trader is looking for a directional guide of the market the simple moving average might be a good choice. In addition, moving averages also assist in relating the buying and selling momentum.
Another important aspect of a moving average is being able to pinpoint support and resistance levels. Support and resistance levels are the main barriers in which prices are tested when they are moving up and or down.
There are several types of moving averages. The simple moving average we already discussed also is defined as SMA. There is also the exponential moving average (EMA) along with the weighted moving average (WMA). The exponential moving average is considered a heavier weighting average than the SMA and is typically used on more up to date values. The weighted moving average (WMA) is similar to that of EMA, however the WMA helps smooth price curve for a more defined trend identification.
The relative strength index (RSI) is another widely used indicator of traders. The RSI is really an indicator which compares the size of recent advances to recent losses with the attempt to determine/define conditions of an asset being either overbought and or oversold. The RSI is also considered a very popular tool because it is also used to confirm trending formations. If the trader believes that a trend is taking place, the RSI may be used for confirmation.
The Average True Range (ATR) is an indicator which is used to determine volatility. This indicator is extremely useful and often implemented by traders. In laymen terms the ATR measures volatility in price action. The ATR was conceived by Welles Wilder. Because of the volatility within the forex markets the ATR is used on a consistent basis by traders. The ATR is more often than not used to determine/gauge historical volatility trends as opposed to getting a handle on future price direction.
In closing, the moving average indicators along with the relative strength index and average true range are strong examples of popular indicators used by successful forex traders. In addition to these indicators there are teens of additional indicators available and should be used in accordance to the trader’s strategy.