In this article, we will look at the best technical indicators used by forex traders around the globe. Before we jump to the individual indicators, let’s understand first what technical indicators are and how you as a trader can make use of them. If you want to also learn more about forex trading, you can go here.
Technical indicators are tools that help traders to understand price movements better – from identifying trends to assessing whether a market is overbought/oversold to measurements of volatility. Indicators can vary from simple ones – such as the moving average – to more complex ones (for example, the Ichimoku Cloud indicator).
Why are technical indicators popular?
They help traders to define entry/exit rules, which makes it easier to keep your emotions under control and follow your trading plan. With fundamental analysis, there is a lot more room for discretion and defining entry/exit points can become difficult. In fact, many traders who use fundamental analysis make use of technical analysis to help them determine the optimal price levels to enter or close a position.
Now that we have defined what technical indicators are and why they are popular, let’s have a look at the 5 best technical indicators for forex traders.
Moving averages are one of the most popular technical indicators and are used to identify trends in a market. For example, if a short-term moving average crosses over a long-term moving average, this could signal the beginning of an uptrend. Moving averages are also used to spot a trend reversal.
Moving Average Convergence Divergence (MACD)
The MACD consists of the MACD line (difference between two moving averages), the signal line (moving average of the MACD line) and the histogram which is representing the difference between the MACD line and the signal line.
The MACD line is the faster line and will react more quickly to price movements. When the MACD line crosses the signal line (the slower line), the crossover could indicate the beginning of a new trend.
RSI (Relative Strength Indicator)
The RSI is a popular indicator that helps us identify if a currency pair is overbought or oversold. The indicator is oscillating between 0 to 100. A value between 0 to 30 indicates that the currency pair is oversold, while a value in the 70 – 100 region is signaling that the currency pair is overbought.
Traders can use this information in different ways. A trader looking to trade a reversal might wait for the RSI to enter overbought or oversold territory before placing a trade. The RSI can also be used to spot divergences between the oscillator and price action.
ADX (Average Directional Index)
The ADX is a trend-following indicator that measures the strength or weakness of the underlying instrument’s price movements. The larger the value, the stronger the trend – and vice versa for smaller values. Generally, a value above 25 is seen to be indicating a trending market. The ADX is a very popular indicator and is often used in conjunction with other indicators to create trading systems.
Bollinger Bands are made up of an upper and lower band and plotted two standard deviations away from the simple moving average. Narrowing bands indicate reduced volatility, while widening bands indicate increased volatility.
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