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In the Forex market, making a profit means success. This success often proves hard to come by because of how volatile the market could be. This makes a lot of people question how profitable Forex trading gets. However, relying on technical analysis and using it as an advantage presents profit to those who look in the right places — Forex indicators.
Technical analysis is the study of current and previous price action in the market. Along with other tools, traders can accurately predict what will happen in the market and be in positions to profit when the right time comes.
Forex Trading Indicators
Tools for technical analysis are called indicators. Many Forex indicators cater to different needs, all of which help traders assess the current market situation and draw predictions based on trends observed. Although they may vary in technicalities, they all have one purpose: recognising potential profit based on market behaviour. One of the benefits of using Forex indicators is the convenience traders get using it instead of simply going off the price chart. Many forms of indicators also offer flexibility to traders. Since there are plenty of types of indicators, implementing them is possible in isolation or as part of a bigger strategic framework. The proper use of Forex indicators promotes consistent trading and a greater likelihood of profit.
Picking a Forex trading indicator
Because there are so many to choose from, traders can often be overwhelmed when picking which Forex indicators to use. A good way to choose a Forex indicator is by determining your current resources, evaluating your aptitude and experience, as well as setting specific and realistic goals. Making and maintaining a detailed personal inventory of assets also allows you to keep tabs on what you can do when an opportunity presents itself. Having a 360-degree view of your current position in the market makes it easier for you to know which Forex indicators will help you achieve the goals you’ve set for yourself.
There are a variety of ways in using Forex indicators, dividing indicators into different types. One of the most common types used are oscillators, which help determine the market state. There is also support and resistance levels that help the trader decide market entry or exit.
Oscillators
Oscillators, or oscillates, gravitate between two levels on the price chart, hence its name. These Forex indicators are designed to show when an asset is being overbought or oversold. At extremely high or low levels, a reversal in the current trend is possible. Oscillators help detect when reversals, extension, and exhaustion could happen. Strategically, it’s valuable in determining the current state of the market and be in a position to buy into a currency that’s about to appreciate or vice versa.
Here are some popular oscillator indicators:
- The Commodity Channel Index (CCI) – placing the current trends in context by comparing to a baseline value;
- The Moving Average Convergence Divergence (MACD) – a favourite that compares two Exponential Moving Averages (EMA) over a certain period;
- The Parabolic Stop and Reverse (PSAR) – used to identify possible reversal points by periodically placing a dot above or below a current trend on the chart;
- The Relative Strength Index (RSI) – used to gauge the strength of the current trend in price action; and
- Stochastics– use probabilities to compare the current price and its possible trend to a relative average value.
Support and resistance
Support and resistance level indicators mark distinct areas that restrict changes in pricing to happen. The support level is the point on the price chart where a currency’s value cannot fall beneath and the resistance level, its converse, is the point on the price chart where the currency’s value cannot drive further upward. These indicators are used to identify these two levels, which help traders decide whether or not they should enter a market. Having very little room between the current price and the support level means a generally secure pricing and a lower likelihood of losses. On the other hand, having a small margin between the current price and the resistance level means that there isn’t much profit to be made if you decide to buy-in.
Here are some popular support and resistance indicators:
- The Average True Range (ATR) – focuses on the current volatility of a currency;
- Bollinger bands (BBS) – similar to ATR wherein it measures the volatility of a currency’s pricing;
- Custom indicators – aim to give the trader full control in what they want to monitor by conceptualising their indicator as a combination or variant of other indicators;
- Donchian channels – another favourite that divides the price chart into the upper, middle, and lower band based on past pricing over a set period; and
- Pivot Points – establish levels by examining the periodiocity of the closing values of a currency.
Although Forex trading could be intimidating because of how abstract it appears, using Forex indicators shows that it all comes down to a study of price action. Success in the market comes with persistence, having the right tools, and implementing Forex indicators. All kinds of traders, whether breakout, retail, reversal, or trend, can benefit from using Forex indicators suited to their needs. In the end, the best indicators are the ones that work for you.
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