All You Need to Know About Forex Indicators

If you have money left over at the end of the month, instead of just letting it sit in your bank account, you might decide to invest it, so you can make money with that money. One way of investing is in Forex, something I am wholy unqualified to talk about. So for that reason, I turn this over to a reader, to explain things about Forex Indicators.

Whether you’re a beginner or a seasoned trader, the challenge of finding the perfect moment to execute your strategy is both an exciting and fascinating process. And, as fascinating as it might be, it is important to know that there is nothing like a one-size-fits-all strategy in forex trading. Simply put, there are numerous strategies or market indicators you’d need to master to be able to determine the perfect moment to execute a trade. The excellent moment to buy or sell can be determined through these indicators. 

Forex trading and trading platforms have a handful of tools that aid you in trading, but this article will focus on 6 of the most effective indicators.

Simple Moving Average (SMA)

Most traders are known to trade by simply using this straightforward approach of following the direction of the trend. This indicator simply reflects the arithmetic mean of the average price for a specified time. Its primary purpose is to highlight a trend by smoothing the price movements.

As the definition suggests, the SMA indicator is preferred in letting a trader know the probable direction of a trend. But, it is not the most reliable tool for warning you of any price movements in advance.

The SMA indicator uses two data sets in its operations. First, it calculates the average over an extended period usually 50, 100, or 200 days. Secondly, it calculates shorter period averages of either 10, 15, or 20 days.

A new trend is signaled by the SMA indicator when the calculated long term average moves below or above the short-term average. Trading experts at advise that the helpfulness of SMA indicators largely depends on unique trading personalities and psychology. But, they generally allow a trader to learn and experiment what works best for them.

Exponential Moving Average (EMA)

Working in almost a similar fashion to the SMA, EMA signals the direction of trend movements. Essentially, it relies on recent prices and responds to their changes faster than SMA. EMA calculates short-term averages that include 12 and 26 days while the long term averages are calculated from 50 up to 200 days.

EMA helps traders build upon their strategies. One of the most popular and effective strategies is to trade once SMA and EMA cross. But, buy when the short term moving average goes above and sell as soon as the shorter MA is below.

Moving Average Convergence Divergence (MACD)

Essentially, the SMA and EMA indicators show the currency pair trends and whether there’s a significant move up or down. But, a more insightful tool is needed to test the reliability of the indicators. Simply put, you need to confirm the trend you’re seeing.

And, this is where MACD comes into play. The MACD indicator is not a tool for generating sell and buy signals but rather is useful in understanding the trends by analyzing and confirming the tools and how reliable the results are. Simply put, MACD is a momentum indicator that measures the strength and reliability of trends.

MACD relies on both the SMA and EMA with its core aspect being the calculation of the divergence between the slower and faster EMA. Also, the Rate of Change Indicator is used in place of MACD by some traders.

Pivot Point Indicator

This is a vital tool that helps forex traders determine the resistance and support points. Resistance and support values are essential in trading as they are necessary for analyzing patterns in chats. This indicator has technical analysis attributes.

Support and resistance points refer to the price levels observed on charts that highlight the tendency of barriers preventing price movement in a particular direction.

Pivot Point indicator tool helps in the projection of resistance and support points. These points help traders an insight into the zones and the excellent points of entry and exit.

Pivot point analysis involves many calculations that include Fibonacci, standard, or the Demark pivot point. However, it is important for traders not to use pivot point indicator tools as a trading system. Rather, they are helpful in determining and allowing you to exploit resistance and support points. They allow you to have better open positions and enhance your trading strategies.

Bollinger Bands

This is the most common profit indicator. And, it is a volatility channel as well. Thirty years since it was first used, it remains one of the most effective indicator tools in forex trading. Two parameters are involved in its application.
  • Number of days in the moving average
  • The frequency of price-data change standard deviations over the same period
The results of the two parameters present “bands” that widen together as the volatility increases and narrow together as volatility decreases. For effective trading using the Bollinger Bands, have more information on
  • Market bottoms and tops
  • Potential price targets
  • Volatility breakouts
  • Continuity or reversal of the trends
  • Period of market consolidation

Fibonacci Retracement Indicator

This is one of the most critical components of technical analysis in trading. But, it is not reliant on the Fibonacci sequence. Rather, it relies on the mathematical ratios that exist between the series numbers. There are three common Fibonacci ratios used in technical analysis by Forex traders; 0.236, 0.382, and 0.618.

The relationship between Fibonacci and forex trading is a rather complicated one and we recommend you research more of the magic that goes into mathematics. Especially, more readings are required on the golden ratios.

The general rule of Fibonacci retracements in trading as well as the use of ratios is that they signal the resistance and support lines as soon as price movements hit closer to the Fibonacci ratios. Simply put, this indicator tool helps signal potential price movements before they happen. This indicator works better when complemented by other tools for more accuracy and safety.

Forex trading can be fun but especially challenging for beginners. There are tons of things to avoid as a beginner and tons more to learn every day to hone the trading skills. And, indicators are the first step to sharpening the skills. To be a good trader takes patience, great technical analysis and strategies, and controlled emotions - and perhaps more importantly, a good platform and high-end indicator tools. .

Penniless Parenting

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