If you are a beginner in the forex trading world, you need the appropriate technical indicators to increase your chances of success. Remember, the indicators you choose will play a role in translating trends on averages and positions. Further, technical indicators dictate the form of opportunities that appear in your nighttime research.
Choosing the right technical indicators allows you to develop a sturdy base for success. Making poor choices exposes you to risks and losses. Read on to understand the different groups of technical indicators in foreign exchange trading.
Understanding Technical Indicators
Technical indicators are available in various sizes and shapes. There are no particular indicators for analyzing forex trades. As a trader, you want to learn and acquire experience on the range of technical indicators available. With practice, you will identify with, and develop a liking for particular indicators that affiliates with your trading strategy. Technical indicators can be classified into various groups as we shall see below.
1. Lagging Indicators
Lagging indicators are established on the previous price data of a currency pair. Lagging indicators like trading volume and moving averages come in handy to verify the presence of patterns and trends that are happening. Identifying advancing patterns allows readers to develop trades depending on their prediction that the currency pair maintains the pattern or trend. Popularly used indicators include:
· Bollinger Bands
Bollinger bands are established on the SMA (simple moving average), a lagging indicator that can be valuable to your trading strategy. Bollinger Bands illustrate two lines on each side of the simple moving average that indicates a standard variation.
Traders leverage Bollinger Bands to determine overbought situations, that is, when the prevailing currency pair price surpasses the upper line. Bollinger Bands also help determine oversold circumstances, that is, when the currency price drops past the lower band.
· RSI (Relative Strength Index)
The relative strength index is a popular oscillator that indicates a bearish or bullish momentum for a specific currency pair with a scale of 0-100. An asset is termed overbought when the RSI surpasses 70, illustrating a future bearish momentum for the particular currency pair. When the RSI drops below 30, it represents oversold conditions and suggests a possible price rise.
· MACD (Moving Average Convergence Divergence)
The MACD indicates the connection between the exponential moving average and the SMA. Crossways between the two MAs can suggest bullish or bearish momentum, creating a model that trader that can leverage for trade timing. Traders can also rely on the pattern to analyze a price movement’s relative momentum.
· AMA/O (Any Moving Average or Oscillator)
These indicators are established on previous price movements and price data which can come in handy to predict momentum, trends, and patterns for a specific currency pair.
1. Confirming Indicators
When used alone, a confirming indicator provides weak data for traders. This indicator can come in handy to confirm and complement other indicator’s suggestions. As a trader, consider a confirming indicator as a tool you can leverage to verify your work when analyzing a trade using leading or lagging indicators. When specific indicators are endorsing a trade, confirming indicators can come in handy to encourage the trader in that activity.
2. Leading Indicators
Leading indicators try to leverage data from the prevailing currency pair to determine potential future price changes. These indicators can help predict price movements in advance, increasing your chances of earning a profit. Popularly used leading indicators include:
· Resistance and Lines of Support
Resistance and lines of support are robust forex trading indicators. Their basis is that a territory-based currency pair will keep moving between resistance and lines of support until it emerges below or above this territory. Traders can leverage this strategy to earn profits from a movement within a territory.
· Fibonacci levels
Fibonacci levels are established on a historical concept and mathematical ratios. They are some of the dominant indicators that foresee price movements from traders across the world. Fibonacci levels are prevalent, making it reliable, seeing that numerous traders rely on them to determine their exits and entries.
· Ichimoku Cloud
The Ichimoku Cloud is a complex data-oriented indicator that is ideal for experienced traders. It relies on calculations of various moving averages to indicate possible resistance and lines of support.
Beginners in the forex trading industry need to try different technical indicators to identify one that aligns with their strategy.