Successful forex traders know how to use the right indicators in order to make profits. There are many different types of indicators available for the modern forex trader. Some of these offer very high margins when used effectively.
If you are looking to venture into the forex market, then you need to familiarize yourself with the different kinds of indicators available for use. The following are the four most common types of indicators that every forex trader must know.
As the name suggests, trend following indicators are all about showing the trader the direction of the market. The trader then decides to trade following the established trend. While it is possible to make money using the counter-trend method, this method is also applicable for traders who are experienced. There are many different kinds of trend following tools available. The moving average is one of the easiest and most commonly used trend-following tools.
The simple moving average follows the trend of the price of a number of days and it can be used for both long-term and short-term trading. The established trends are normally broken down into different combinations comprising of different days. Trend following traders must realize that different combinations can result in varied possibilities. Therefore important to take the combinations that work best for your strategy in order to make profits.
The second type of forex indicator commonly used by traders is the trend confirming tool. This kind of indicator relies on an established trend and then uses the price to inform the trader whether the currency pair is trending up or down. Just like the other kinds of indicators, trend confirming indicators also, are part of the large collection of tools included in trading software like MetaTrader 4.
These indicators also use the moving average. They, however, focus more on the difference between the moving averages rather than on the trends established by these moving averages. These indicators are effective for confirming trends because they clearly show whether a trend is an uptrend or downtrend with clear positive or negative signs on the chart. Trend confirming indicators are used by both experienced and beginner traders. Some common trend-confirming indicators are:
- The moving average convergence divergence (MACD)
- The simple moving average
- The exponential moving average
Overbought /Oversold Indicators
Pullbacks play a very important role in forex trading. While most rely on jumping on the trends in order to make profits, others wait for the pullback in order to invest. Traders who do this are encouraged by the low risks that come with trading during pullbacks. In order to trade in these instances though, a proper trading tool that indicates overbought/oversold scenarios is necessary.
One of the most common indicators used for this purpose is the Relative Strength Index. The indicator relies on a simple scale of 100 to show where the main price action is. Downtrends are indicated when the indicator shifts towards zero while uptrends are indicated with the tool moving towards 100. Combinations of various long-term duration charts are included on the indicator and makes their decisions based on the interaction of the different period lines.
The last type of forex trading indicator is the profit taking tool. This indicator is essential for the kind of traders who would like to manage their risk in the trading market. There are many different types of profit taking tools available but the most common of all is the Relative Strength Index (RSI).
A trader is able to establish which trades are winning and which ones are losing with this tool. Just like the other kinds of forex trading indicators, profit-taking tools depend on both the long-term and short-term analysis of the market using the price data. By analyzing the change of the prices over time, the profit-taking tool can be able to give clear entry points and exit points as well, Another commonly used profit-taking tool is the Bollinger Bands.
The forex market is quite volatile and complicated. All traders in this market need be assertive and take action at the right moment. Success in this market depends on the strategies and knowledge that a trader has. While it is not easy to clearly identify the entry and exit points at all times, the proper use of the right indicator can make the process much easier.