In our previous lesson, we learned about the available indicators that you can use in your trading strategy. When it comes to the Forex market, you have to use the different types of indicators to safely make your moves no matter if you are buying or selling. There are multiple technical indicators of Forex trading available to Forex traders. Let’s discuss them one by one.
The first and the most important technical indicator of Forex trading is Bollinger Bands. This indicator is made up of three elements: moving average, upper extreme band, and lower extreme band. The moving average is the average of the price of the previous candles. The upper and lower extreme bands are the volatility bands. These expand and contract as the price changes. These bands describe how the price is dispersed in the standard deviation. The top of the band describes over extended and the bottom is also described as over extended but to the downside. The Bollinger band is a type of the momentum indicator that can be used to know if the market is ranging or trending.
Moving Average is one of the most powerful technical indicators of Forex trading that is widely used by Forex traders to check the price momentum, price direction, and its trend. In moving average, you have a line that represents the average of the previous candles that were created before. For example, if you have a moving average of 14, then the price in that moment will represent an average of the previous 14 candles that came before. Some traders use the Moving Average as a guide to understand the trend and the direction of the market. However, some use it as a guide to understand the price and make their decision.
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RSI, the abbreviation of Relative Strength Index, is simply a trend and the market moving at extreme points. It shows the strength of the price action, the momentum of the speed, and change of that strength. RSI is used to measure the magnitude of historic price changes to determine the overbought and oversold conditions in the price of the currency. Top RSI suggests selling while the low RSI suggest as buying.
Moving Average Convergence Divergence (MACD) is a momentum or direction indicator. This technical indicator shows the short-term average of price, smoother price action, and histogram. The short-term average of price is usually displayed using a blue line and the smoother price action is represented using the red line. When the blue line crosses above the red line, it indicates a buy signal. When the blue is below the red line, it indicates the sell action. The histogram shows how far the two lines from each other.
Stochastic identifies the overbought and oversold conditions, and the different points in the market. This indicator is used for timing the market at its extreme points. Most traders use it to compare the closing price of the currencies to its price range over a given period of time.
ATR stands for Average True Range. ATR is a volatility indicator and it takes an average of the previous candles or bars depending on the charts you are using. This indicator is used to track stop loss or take profit thus helps in keeping the risk factor to its lowest.
These are the six important traditional technical indicators of Forex trading that most Forex traders use. Some use these individually while some often use their combination. It should be noted here that these are just indicators that help you make a decision. Check out more Free & Premium Trading Indicators and boost your trading strategies with them.