Forex indicators are what helps traders know when to enter or exit a trading position. There are many kinds of indicators out there for the forex market. Here is an overview of the major forex technical indicators that are used in this market.
Forex Technical Indicators
Most forex trading strategies use some kind of technical analysis to help them trade. The following are some of the most commonly used forex technical indicators that traders use to know when to enter or exit a trading position.
Support and Resistance
Virtually all forex trading indicators use support and resistance as a variable. Support is the lowest price point a currency hits before it bounces back up over a given period of time. The resistance is the highest price point it hits before bouncing back down over a given period. Traders use these levels to analyze when to enter or exit a trade.
If the support and resistance is consistently at the same price points, than we call this a channel or a price behavior that is moving sideways. If these levels are found to be at progressively ascending or descending points, we call this a upward or downward trend.
When a price breaks out of a support or resistance level in the case of a channel, it might be an indication that there will be a significant shift in the prive movements. If it breaks out of the support level, it might indicate that the price will begin a downward trend. If it breaks out of the resistance level, it might indicate an upward trend.
Moving Averages (MA)
Moving averages are some of the simplest and easiest ways to predict price movements and momentum. You can use it to see directional shifts and trends. The MA is calculated by taking all of the closing prices of a period and then dividing them by the number of days in that period. So if you want a 30-day moving average, you just calculate the closing price of the previous 30 days, then divide by 30. By doing this everyday over time, you get a line graph that is smooth and may help you see directional changes more clearly.
There are 3 types of moving averages. There is the simple, weighted and exponential moving averages. The simple is a straightforward averaging calculation. The weighted gives more significance to more recent prices. The exponential also gives more significance to recent prices, but does it with a very complex calculation.
MACD (Moving Average Convergence-Divergence)
The MACD is calculated by subtracting the 26-day and 12 day exponential moving averages. When the difference is positive, it indicates that there might be an upward trend. When there is a negative difference, there might be bears on the way.
The difference of the two MA’s forms a single line on a chart. The single line oscillates over a line that represents the zero point. When the MACD line is above the zero line, it indicates an upward trend. When it is below the zero line, the price movements may start declining.
Word of Caution
Here is a word of caution in utilizing these indicators to trade on. Remember, these are not guaranteed accurate predictors. These analysis methods won’t guarantee that the market will move the way you want it to.
Even the best forex indicator will fail you at some point. There are many great forex trading strategies, but they are just tools. These are meant to be a guide, not your controller. Trading is a human activity and these are just tools to be used in your hands, not the other way around.
Alternative: Fundamental Indicators
Fundamental analysis looks at the intrinsic value of a particular security. The way it’s done with corporations is largely by looking at their financial statements and their regular earnings reports. The way it’s done in the forex market is by looking at the intrinsic economic value of the currency’s country.
Nations don’t prepare financial statements or earnings reports. But the equivalent can be found in a lot of the macroeconomic reports that are released regularly by government agencies and economic research firms. These are used as the main forex market indicators in the fundamental analysis world. Often these are called economic indicators.