If you are a novice who wants to engage in forex trading, you must first understand different forex indicators and how they are applied. On the other hand, if you are an experienced trader, it is essential to understand the right forex indicator combination, which can tailor you to making a consistent gain in forex business. Let’s have a look at the best forex trading indicators and how to interpret them.
Moving Average is one of the most reliable indicators popularly used due to its simplicity and effectiveness. It is regarded as the trend indicator because it helps follow and identify a trend. Technically, the moving average signifies the average value of price over the selected period. In simple terms, MA will follow the price, and the line assists in smoothening the price volatility and getting rid of unacceptable price. The best place to trade with acceptable price is on reputable brokers like AxiTrader (https://mytradingtools.com/axitrader/) which you can get the lowest spread and good uptime servers to avoid price gaps and missed executions.
Therefore, this helps you to concentrate on the primary trend but not on the corrections. Basically, there are four types of moving Averages – Exponential, smoothed, simple, and linear weighted. The distinctive feature about them is merely technical, and experienced traders highly recommend the simple moving average. Just keep in mind that MA doesn’t predict the future prices; notwithstanding, it outlines the present direction of the market.
Pros of MA
- Find trend reversal
- Identity trend direction
- Show potential resistance and support levels
Lags behind the present price (It will technically change slower than the price chart since its values are based on the past price history)
How to interpret MA
In simple terms, a trend is regarded as bullish when the currency pair price is above the MA, and bearish when the currency pair price is below. Besides, check how MA with other periods behaves near each other.
Bollinger Bands is a popular technical analysis tool. It encompasses three different lines drawn, with one above and another one below the security price line. Its distinctive period moving average is identified as midline to make an envelope. These particular lines identify a volatility or band range in which a specific security price is going downwards or upwards. Volatility happens on the conditions of standard deviation for specific security, which is marked by lower and upper band/line. In simple terms, Bollinger bands place the price in a type of box between two outside lines.
The price revolves continuously around the middle line. It can move and test levels far from the outside lines; however, it does that for a limited time, and cannot get far away. The price goes back to the middle after it has deviated from the center. You can confirm that there is a time when Bollinger lines come close, and on the other time, they spread, and their range became wide. The wider the price range, the higher the volatility of the market, and vice versa.
Bollinger bands indicator is usually awesome in a sideways market. Usually, the indicator lines can be utilized as resistance and support levels, where people can open their positions.
On a strong trend, the price can hold on for a long time at one Bollinger line; hence, not ideal for trending markets.
How to interpret
When you identify the price approaching the upper band, it implies that currency pairs have been overbought. In simple terms, traders at this time make money on the advance of the price and close trades to take profit. What happens is that the overbought currency pairs stop to rise and fall instead. The rising price above the upper band signifies a selling signal. On the other hand, the price below the lower band is a buy signal.
This is another reliable indicator commonly used by experienced traders. It is utilized as an indication and confirmation of a reversal or a breakout. It can as well be utilized for validating trend line break to avoid fake-out. Technically, it shows the market phase, and the MACD histogram is the variance between a 26-period and 12-period EMA (Exponential moving average). In simple terms, MACD utilizes the MA; however, it encompasses other formulas as well. Therefore, it belongs to the oscillator type of technical indicator.
Oscillators are situated in different boxes just below the price chart. When Oscillators rises, it turns back down, and so does the price chart. What differentiates the two is that MACD will get back near 0 or even lower. The declining price will most probably be smaller. The MACD works similarly.
It helps understand how other Oscillator indicator works
MACD can be utilized in trending and ranging markets
This indicator lags behind the price
How to interpret
You can interpret the MACD indicator by dramatic rise and fall. Buy when the histogram bar begins to grow after a massive decline. Sell when a histogram bar begins to decline after a huge advance. Zero lines is another extra confirmation. When MACD crosses the zero line, it insinuates the strength of the bears or bulls. Basically, sell when MACD-histogram decline below zero. Buy when it MACD-histogram rises above zero.
Basically, the above three forex trading indicators are popularly used by experienced traders. There are other different indicators in the trading world, and this becomes challenging to master and implement all of them. Therefore, you require a few that are more efficient and easy to use.