Forex trading is the conversion of a currency into another. Both experienced and newbies are putting extra effort each day to succeed in this business of buying and selling currencies. Although becoming a successful forex trader can be a challenging task, several technical analyses can be applied.
The technical analysis, which is the study of past and present price for currencies, uses several tools known as indicators. These indicators help the user to place developing price action into manageable contexts.
Benefits of Technical Indicators
- Technical indicators offer freedom and flexibility to the user
- Technical indicators are also versatile since they can be implemented either in isolation or within a broader strategic framework
- Technical indicators also promote consistency and discipline in live forex trading conditions.
How to Select the Best Technical Indicators for Forex Trading
In order to identify which technical indicator best works for you, it is essential for a trader to first determine his trading aptitude, resources he has available, and his overall goals.
In this article, we will look at some of the best technical indicators available in forex trading.
Forex oscillators are used to indicate the gravitation between two levels of prices on a chart. Forex oscillators indicate when a security is being oversold or overbought. They are usually used to measure the pricing impetus related to market reversal, exhaustion, and trend extension.
- As leading indicators, oscillators help traders identify opportunities and trends before the price fluctuation occurs. This allows the traders to maximize their profits.
- Forex oscillators also offer critical awareness of the motion and speed of the market. The speed and the momentum of the market are usually independent of the trading volume or the currency price.
- The main disadvantage of oscillators is that, just like any other indicators, they are not foolproof. False signals do occur once in a while.
2. Moving Average Indicators
Also known as the simple moving average, this indicator is used to identify a current price trend’s direction. This is done without interfering with the shorter-term price spikes.
The moving average indicator divides the combination of financial instrument price points over a certain period with the number of data points representing a single trend line. Moving average indicators give the traders a chance to see the general trend of the currency pair they are selling or buying.
- Simple moving averages, in particular, tend to be more stable as compared to the other analysis tools
- Traders working with long-term time frames, such as position traders, benefit more from moving averages indicators.
- Traders working with short-time frames don’t tend to benefit from the moving average indicators.
- Since moving average indicators are based on historical data, they tend to be much slower when responding to the fast-growing forex market conditions.
3. Stochastics Oscillators
Like oscillators, the stochastic oscillators are also designed to indicate when a security has been oversold or overbought. The main difference between the oscillator and the stochastic oscillator is that stochastics can point out probable value reversals.
Although there are many versions of stochastics, the slow stochastic is the most implemented indicator. This is because stochastic is easy to use, and they are also very accurate in their findings. Seasoned and novice traders implement this technical indicator as it can help traders determine good entry and exit points.
- Stochastics are easy to understand
- They offer precise and accurate trading signals
- They create many opportunities for traders as the signals usually develop on a single forex chart
- Nothing is usually 100% accurate, and so, even stochastics can produce false signals at times
- Since the timelines for stochastics often extend for long, many daytime traders find limited value for the indicator as they trade during shorter-time frames.
Although technical indicators can assist forex traders by offering trend signals, simplified information on currency prices, reversal warnings, and much more, it is essential to note that the list of indicators discussed above is not in the least exhaustive.
Keeping in mind that every trader is unique and that trading variables change and adjust depending on the trader’s preference, putting a range of indicators into use instead of one can help you become successful in forex trading.