Forex indicators can be good helpers in trading if you know how to apply them. In fact, it is not difficult and anybody can easily learn how to use them. At first, let’s consider what are Forex indicators and distinguish some types of them.
What is the Forex indicator?
Forex indicators are mathematical formulas that help a trader to determine volatility, levels, all possible phases of a trend, entry and exit points in the market. Indicators look like colored histograms or graphs showing the flow of financial funds.
Put simply, indicators are the trading signals, which help a trader make decisions about buying or selling a particular financial instrument.
Types of indicators
At present, there is a huge number of different indicators. Moreover, if you are an experienced trader, you can create your own indicators. You can find hundreds of indicators on the Internet. But I advise you to use the standard indicators built in MetaTrader 4. In terms of functionality and application, they all fall into three main groups:
- trend indicators;
Trend indicators reflect the trends in the dynamics of prices in the foreign exchange market. There are three main trends in price dynamics: upward movement, downward movement, and sideways movement. They help determine the prevailing direction of the price movement – the trend, – smoothing price data for a certain period of time. In simple words, they visualize the trends that are present in the market.
Trend indicators are very effective on long price trends. The signals of the trend indicators are late, that is, they do not give premature signals. Despite, they determine the prevailing trend at the moment, and you can always work in its direction. That is, they do not give signals about future price changes, but they report the direction of price movement at the moment.
In the trading terminal, the trend indicators appear as graphs under the price chart or are imposed over it. In the picture below you’ll see the Moving Average trend indicator.
The most popular trend indicators are Moving Averages: EMA, SMA and WMA, Bollinger Bands (BB), Ichimoku Kinko Hyo, Parabolic SAR indicator, Advance Decline Line (ADL), Average Directional Index (ADX), etc.
Oscillators are indicators, which are used mainly in a calm market when prices move in the horizontal direction within the price corridor. They seem to show fluctuations in prices in the market during the period of the flat.
Oscillators are referred to “leading” indicators since they indicate the direction of the price movement with a slight lead or sometimes simultaneously with it.
Since oscillators are used to predict future price changes, traders apply them to get more benefit at the expense of greater risk. So, for example, with the oscillator it is possible to open a position in the opposite direction, anticipating the future turn of the trend. In general, the oscillators are very effective in showing the times of overselling and overbuying on the chart, thereby they determine the entry and exit points in the market.
In the trading terminal, the trend indicators appear as graphs under the price chart or are imposed over it like below:
The most popular oscillators are MACD, Stochastic Oscillator, Average True Range, Relative Strength Index (RSI), Bears Power, Bulls Power, Momentum, etc.
In the Forex market, in fact, there are no volume measures. In Forex, only the so-called tick volume is available. Volume indicators in Forex point to the number of transactions in a certain period of time. On the graphs, they often have the form of columns of histograms, the length of which depends on the number of transactions. The more the number of transactions, the longer the column. What amounts are spent at the moment is unknown.
Despite this, many traders like to use volume indicators. Traders regard volume indicators as follows:
- If trading volumes grow, then interest in this particular currency pair increases. In this case, the trend may be strengthened, but there may be a reversal.
- If volumes reduce, interest in the pair decreases, then the flat will come or the trend will change its direction.
- If there is a peak of volumes, then a trend reversal is not excluded.
- Sometimes a gradual decrease in volumes leads to a sharp price change.
Here are some popular volume indicators: Volumes, Money Flow Index, Accumulation/Distribution, On Balance Volume.
A piece of advice: how is better to use Forex indicators?
Forex indicators can ease your trading. So, do not neglect their applying. And here are some tips how better to use indicators:
- Test any interesting indicator.
- Choose several different indicators, for example, 1-2 trend indicators, 1-2 oscillators, 1 volume indicator.
- Don’t forget about the unpredictability of the Forex and don’t trust indicators fully.
- Follow the chosen trading strategy. Indicators should not guide your strategy but should help. These are very powerful tools that help. A very common mistake when the strategy is built around the Forex indicators and not vice versa.
So, keep calm and use indicators wisely. Good luck!