Every Forex trader knows that you must supplement the information in your chart with a number of technical indicators. Commonly used indicators include strength indicators, volatility indicators, trend indicators and cycle indicators. These indicators not only help us determine where the market is heading, but also when a trend is about to end and we should either exit the trade or, with a good signal, reverse the trade.
The following 6 indicators are most commonly used by Forex traders:
- Stochastic Oscillators – Stochastic oscillators help a trader determine the strengths or weaknesses of a currency by comparing the closing price with a price range over a period of time. When the trader detects a high stochastic that says the currency may be over buying and you should be small or bearish. Conversely, a low stochastic indicates that a coin may be selling excessively and you should be bullish or long.
- Bollinger Bands – The Bollinger Bands contain most of the value of a coin in the bands it appears. Each band has three lines – the bottom and top lines show the price movement and the middle line shows the average value of the currency. When the market experiences high volatility, the gap between the lower and upper bands will widen. On your candlestick or bar chart, if a bar / candlestick touches the upper band, the coin is considered an additional purchase, and if the bar / candlestick touches the band below, it sells out more.
- Average Directional Movement (ADX) – ADX is used to determine whether a currency is entering a new uptrend or downstream. ADX is also used to determine how strong the trend is.
- Relative Strength Indicator (RSI) – RSI uses a scale of 0 to 100 to indicate the highest and lowest values in a given period. When the price of a coin rises above 70, the coin is considered an over-purchase. On the other hand, a price below 30 would probably indicate that a coin has sold out.
- Simple Moving Average (SMA) – SMA is the average currency value for a given period of time compared to other prices in the same period. To explain how an SMA works, there would be an SMA divided by the value of the 7 closing currencies before the closing price over a period of 7 days.
- Moving Average Convergence / Divergence (MACD) – MACD is another oscillator that shows the momentum of a currency as it relates to two moving averages. As we discussed in previous articles, when MACD lines cross, that crossing may indicate the beginning of an uptrend or downtrend.