When you are new to forex trading, analyzing the market is always a pickle. Although you might be getting new tips and advice from different sources, choosing the strategies to follow is difficult.
Forex trading is one of the most profitable online businesses. However, your success in this field largely depends on your zeal to learn new strategies and ideas. It also tests how well you know the current world affairs and your prediction on how events will affect the market.
To help you with market analysis, forex trading platforms have incorporated some technical tools called indicators. The indicators provide a prediction of how a currency will perform against other currencies. They occur in the form of graphical features such as plot lines, bars, etc.
There are numerous indicators available in the market, each suitable for different trading habits. In this article, I will share with you four crucial Indicators you need to know as a trader.
1. Moving Average
This is probably the most common and best indicators used by traders. This indicator works by showing the average trend for a particular currency over a specified time.
Therefore, if you need the trend of the HK market past week, the Moving Average will plot the trading prices for the past seven days. This makes it easier for the trader to analyze the market and to get an idea of what to expect.
It is important to note that moving averages with a shorter period may be more accurate and have better reaction changes in prices. You’ll, therefore, notice that a 7-day moving average reacts faster than that of a 7days.
2. RSI (Relative Strength Index)
The RSI is also a proven indicator in forex trading. It has proven to be very useful and has produced tremendous results for some traders.
This indicator is an oscillator that measures the price movement and its momentum in relation to time then returns specific value from 0-100. Most traders use it to determine those market conditions that may be undersold or overbought.
When the RSI is 0, that means that the conditions are oversold. When 100, the conditions are overbought.
This indicator is, therefore, not for every trader, but it’s suitable for those who prefer buying low and selling high. Nonetheless, the indicator may at times produce some fake signals, and so, you should be careful.
3. MACD (Moving Average Convergence/Divergence)
This indicator is used by traders to determine the moving averages that are real and fake. It does this by identifying the momentum behind the price trends.
Traders can, therefore, determine trend reversals early on and make the necessary changes to their strategies. When interpreting its chart, you’ll come across three critical numbers.
The first number on the chart represent the period numbers used for getting the faster-moving average. The second shows the periods used for the slower moving average. The third shows the difference between the two averages.
MACD can, therefore, help you determine the trend and momentum of the market!
4. Bollinger Bands
This is one of the essential indicators any trader could have. It is used to measure the variation degree for the trading prices. (Volatility).
The indicator does this by showing that when the market is very active, the bands will expand, and when there’s minimal activity, the bands contract. Its main components include the Moving average, the upper band, and the lower band.
The moving average is usually calculated from a 20-period interval. The upper band is about 2-2.5 above the standard deviation while the lower band about 2-2.5 below the Moving average standard deviation.
Understanding how this indicator works and knowing how to use it helps traders determine their trading decisions.
Trading indicators are vital for any trader if you are to reap profits from it. Working with one indicator alone may not be enough; you to compare results of several indicators to make a wise choice.
Besides the Moving average, RSI, Bollinger Bands and MACD, there are numerous other indicators you can explore and learn to use. Remember, what works for you will not necessarily work for me.
It’s thus clear that if you want to succeed in Forex trading, be sure to learn about trading indicators!