What are the most popular and effective technical indicators for currency trading? Most active traders use at least a half-dozen technical analysis indicators to judge price activity, know when to enter and exit, follow trends, get early signals of upcoming changes in price action, and simply to get information in front of them at any given time.
Whether you’re an experienced trading professional or an amateur market enthusiast, the goal of every trader should be to find a platform for trading forex that offers excellent customer support, lots of charting capability, and plenty of TA indicators.
It helps to have a solid research library, too, but the other factors are what makes or breaks a given platform in terms of utility. Here’s a quick look at the most important ones among dozens available. In fact, there are well over 100 in the trading universe, but many are so specialized and complex that they don’t make the cut of any list that purports to offer the most useful ones. Following a review of the top four is a look at how to use them when placing forex trades.
Simple Moving Averages
Whatever time period you choose, the SMA will show you the average of prices during that time frame. It’s a very simple but also very powerful bit of data. Not always used as a single source of decision-making, the simple moving average is the best of the big picture signs used by brokers, floor traders, professional money managers, and everyday stock market enthusiasts.
Exponential Moving Averages
This average is very similar to the simple version but gives more importance to recent prices. It makes sense in many ways because if you’re looking at a 2-day chart, those oldest values aren’t as relevant as the ones that were posted just a few minutes ago.
Moving Average Convergence Divergence
Using a complex math formula to compare 26-day and 12-day trends, the MACD does two things quite well. It not only spots a trend early in its formation, but has the ability to show you how strong the trend is. For those involved in short-term analysis, like day traders and others, the MACD time-period parameters can be set in any way that makes sense.
Another math-heavy formula is behind this useful trading tool. The bands are a range around chart prices. You look for visual cues for value lines to break above or below the bands. The BB can reveal an upcoming trend.
How to Use Indicators
Foreign exchange is a fast-paced world that demands lots of data and quick decision-making skills. TA indicators can meet the challenge. The question, especially for those new to forex, is how to use indicators. For example, is the SMA reveals a strong upward trend in price, what can you do about it? Use SMA to get a general feel for the price direction on whatever time chart you desire. Then, compare short-term charts with longer ones to see if things match up. If the SMA on a 1-minute chart matches the trend on a 5-minute, 15-minute, and 1-hour chart, you have a solid indication that the trend is valid.
The same goes for the EMA, but you need to remember the difference between the EMA and the SMA. In most cases, EMA data will be more reliable because it is more refined, and gives greater weight to more recent price changes and values. Some people look for cross-confirmation between multiple time periods on both the EMA and SMA charts to solidify their expectations about price direction. In most cases, whenever you use TA indicators, it’s helpful to compare what they tell you. When you find contradictions, that’s a sign to stay out of the market.
When two kinds of averages, simple and exponential, disagree about the direction of price, the data is trying to tell you something. Usually, it’s trying to tell you that the markets are in a sideways pattern, where values go up and down for hours, days, or weeks before there’s a resolution. Sideways markets are the natural enemy of day traders, so pay attention to all your technical data, not just your one or two favorite indicators.
Use Bollinger bands to time your entry and exits. Breakouts can be quite revealing. They often show when a trend has ended or is about to end. Likewise, MACD can do pretty much the same thing, but with a twist. The moving average convergence divergence can expose the power behind any move. For forex enthusiasts, this is one of the most useful pieces of data. It’s one thing to know the direction of value and have it confirmed by both the EMA and SMA, but when the MACD says here is a strong trend that has a lot of momentum, then you have some seriously great information at your disposal.