Every forex trader knows that you need to supplement the information on your list with some technical indicators. Commonly used indicators include strength indicators, volatility indicators, trend indicators, and cycle indicators. These indicators help us determine when the market is moving, as well as when a trend is about to end and we should exit the trade or, with a good signal, turn the trade around.
The following 6 indicators are the most used by Forex traders:
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Stochastic Oscillator – A stochastic oscillator helps the trader determine the strengths or weaknesses of a currency by comparing the closing price with a price range over a period of time. When a trader identifies a high stochastic, that currency can be bought too much and you should go short or down. In contrast, the low stochastic indicates that a currency can sell too much and you should go bullish or long.
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Bollinger Bands – Bollinger Bands have the majority of the price of a currency among the bands they display. Each band has three lines: the bottom and top lines show the price movement, and the middle line shows the average price of the currency. As the market undergoes high volatility, the gap between the lower and upper bands will increase. In your candlestick or bar chart, a currency is considered a surplus if a bar / candlestick touches the top band and an oversold bar / candlestick touches the bottom band.
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Average Directional Movement (ADX) – Used to determine whether an ADX currency is entering a new upward or downward trend. It is also used to determine how strong the ADX trend is.
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Relative Strength Indicator (RSI) – RSI uses a scale from 0 to 100 to indicate the highest and lowest prices over a period of time. When the price of a currency rises above 70 it is believed that too much currency has been bought. On the other hand, a price below 30 would probably indicate that a currency is overvalued.
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Simple Moving Average (SMA) – SMA is the average currency price for a given time period compared to other prices for the same time period. To illustrate how the SMA works, closing prices within 7 days will have an SMA equal to adding 7z of the previous 7 closing currency prices.
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Moving Average Convergence / Divergence (MACD) – MACD is another oscillator that shows the momentum of a currency, relative to the two moving averages. As we discussed in previous articles, when MACD lines cross, this cross may indicate the beginning of an upward trend or a downward trend.