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Trading in the forex market is not an easy task. This is why analysts use a wide range of indicators that help them make more informed decisions about whether to buy or sell a currency pair.
In this guide, we tell you which are the top 5 forex trading indicators and how you can use them to improve your trading strategies. Take into consideration that we are not financial advisors and we are not responsible for your investment decisions. This is just for educational purposes.
Let’s start with moving averages. This is one of the most useful indicators to understand the trend of a currency pair during a specific period of time. Users can easily select whether they want to use a monthly, weekly, daily or hourly chart and place moving averages.
If the price of a currency moves above the MA, then we should consider that we are entering a new bullish phase. If instead, the price of a currency moves below the MA, it signals that we are entering a bearish period.
The Moving Average is simply an average price for a specific period of time. This allows us to get more stable price information about specific trading pairs. Moreover, it helps us understand which could be support and resistance levels. The most common MA include 9, 12 and 36.
Continuing with chart analysis, we have a very useful tool that helps us understand which are possible support and resistance levels. Fibonacci levels are not only useful to trade in the forex market but also in other markets.
By using Fibonacci levels, we can get valuable information about the retracement levels to which a currency could move. These levels are determined by the famous golden ratio that can be found in different aspects of life, including nature.
The positive thing about Fibonacci levels is that they can be used through different time frames and assets. Thus, you would get very detailed information about how prices could move. In the following EUR/USD example, we show you how Fibonacci levels are applied to the chart.
The most common retracement levels include 0.618, 0.5 and 0.382.
Let’s continue with the indicators for the Forex market. One of them is the Relative Strength Index (RSI). This indicator is very useful for us to understand whether a currency pair is in an oversold or overbought situation.
With this indicator, we are able to identify momentum in the markets. This could be very useful for us to understand whether an asset could stop growing or falling. Thus, it could be a great tool to find tops and bottoms, at least for short periods of time.
The RSI would fluctuate between 0 and 100. However, we should always focus on two important levels, when it crosses 30 or 70. If it falls below 30, then we are in an oversold condition. If we surpass 70, then we are in an overbought condition.
The Moving Average Convergence Divergence (MACD) is another technical indicator that can be used to trade in the Forex market. With this indicator, we can understand which are resistance and support levels for a specific currency pair.
The MACD is shown at the bottom of the chart (using TradingView), but this could be moved according to your needs. The MACD is used to understand how the market is evolving, the trend and direction and more. You can also know how fast the trend is moving and whether there is a change in the general trend.
Furthermore, the indicator shares with us valuable information as to when it could be a good moment to buy or sell an asset.
The final indicator to trade in the Forex market includes Bollinger Bands. This is a very useful indicator if you want to get accurate information about the strength of a specific trend. If the market is moving higher but you are not sure how strong this movement is, then Bollinger Bands will be very useful.
When we see that the price of the currency we trade is moving away from the outer bands and gets closer to the centre, we should pay attention because it means that the trend is slowing down. Instead, if the price moves far from the bands, then we could be entering a phase in which there is strong price action.
This indicator is useful for us to understand when to leave the market.
