Buying and selling currency at the right moment is what separates the most successful traders from the rest. This process is not based on luck. Traders the world over track useful forex indicators to pinpoint the exact moments when they should enter and retreat from the market.
Having recently checked the review for City Index and decided on a broker for your forex strategy, you may be wondering what are the main indicators that can point you in the right direction when analyzing markets? Here are four of the most important.
Moving averages
Analyzing the moving averages is a great starting point as these provide a snapshot or overview of the direction or trends prevalent in a market. There are four primary moving averages that are used to assess currency pairs and general forex movements: ‘simple’, ‘exponential’, ‘weighted’ and ‘smoothed.’
Moving averages are most commonly used to look at closing exchange rates, but they can also be performed at open or at peaks and troughs. A simple moving average (SMA) can be calculated by averaging the price of a currency during a specific time frame. A 30-day moving average, for example, would be an average of currency prices at close over the preceding month.
Relative strength
The Relative Strength Index (RSI) is a popular forex indicator that informs traders about overbought or oversold conditions. This allows you to spot a retracement, a temporary reversal in price. A retracement marks the end of a particular trend and the start of another one.
Leveraging the RSI in forex trading can be more difficult than it first appears. Experts recommend monitoring the readings and then initiating a trade only if the moving average divergence (MACD), another indicator, shows that the price of an asset may be about to change direction. This highlights why multiple indicators are needed to make effective trades.
Bollinger Bands
John Bollinger created Bollinger Bands more than 30 years ago to provide traders with more flexible indicators that are not set and adapt to changes in the market. This sort of analysis is more commonly known as a volatility channel and uses two parameters to identify whether a trend has started. The first parameter is the simple moving average, and the second is the number of deviations away from that average.
When a currency pair ticks above the Bollinger Band, traders often attempt to profit by selling it. When it falls below the line, buying a pair is usually the best course of action. Bollinger Bands are an excellent way to track volatilityover any given time.
Stochastic Oscillator
Developed in the 1950s, the stochastic oscillator is one of the oldest forex indicators. It measures momentum and, more specifically, whether a trend might be coming to an end. It does this by measuring how prices have changed over a certain period and comparing it to the closing price.
There are two lines, the indicator and signal, represented in the charted oscillator and the intersection of these lines points to a potential shift in trend. This indicator also offers information about accumulation and distribution in markets and thus, complements the moving averages mentioned earlier.
