Forex traders would need to keep in touch with a range of indicators that help them understand when they can sell or buy. These indicators form an important part of technical analysis. Here are the top forex indicators that every trader should know:
Moving average (MA): An essential and elementary indicator, moving average indicates the average price value over a specific period that has been chosen. If the price trades over the moving average, it means the price is being controlled by buyers. If price trades below MA, sellers are controlling the price.
Bollinger bands: This indicator is handy when it comes to measuring the price volatility of a security. Bollinger bands come with three parts, the upper, mid and lower bands. These bands help identify oversold or overbought circumstances. They help identify exit or entry points for a trade.
Average true range (ATR): This technical indicator helps identify volatility in the market. In an ATR, the key element is range. The difference between the periodic high and low is called range. Range can be applied on any trading period such as multi-day or intraday. In ATR, true range is used. TR is the largest of the three measures: current high to low period; previous close to current high and prior close to current low. The absolute value of the largest of the three is called TR. ATR is the moving average of specific TR values.
Moving average convergence/divergence or MACD: This is one of the forex indicators that depict the force that is driving the market. It helps identify when the market may seek to stop moving in a specific direction and is ripe for a correction. MACD is arrived at by deducting the exponential moving average of the long-term from the short-term EMA. EMA is a kind of moving average where the most recent data gets greater importance. MACD = 12-period EMA minus 26-period EMA.
Fibonacci: This trading tool indicates the precise direction of the market, and it is the golden ratio called 1.618. This tool is used by forex traders to identify reversals and areas where profit can be taken. Fibonacci levels are computed once the market has made a big move up or down and looks like it has flattened out at some specific price level. The Fibonacci retracement levels are plotted to spot areas to which markets may retrace before getting back to the trend that has been formed by the first price move.
Pivot point: This indicator shows the demand-supply balance leves of a pair of currency. If the price touches the level of the pivot point, it means the demand and supply of that specific pair are at the same level. If the price crosses the pivot point, it shows a higher demand for a currency pair. If the price drops below the pivot, it shows a higher supply.
Relative strength index (RSI): The RSI is a trading tool that belongs to the oscillator category. It is among the most commonly used forex indicators and indicates an oversold or overbought condition in the market that is temporary. The RSI value of more than 70 shows that an overbought market while a value lower than 30 shows an oversold market. Some traders use 80 as the reading for overbought conditions and 20 for the oversold market.
Parabolic SAR: The parabolic stop and reverse (PSAR) is an indicator that forex traders use to arrive at the direction of a trend, assess short-term reversal points of a price. It is used to spot entry and exit points. The PSAR appears as a set of dots on a chart below or above the price of an asset. If the dot is below the price, it is indicative of the price going up. If the dot is over the price, it shows the price is dropping.
Stochastic: This is among the top forex indicators that help identify momentum and oversold/overbought zones. In forex trading, the stochastic oscillator helps identify any likely reversal of trends. Stochastic indicator can measure the momentum by making a comparison between the closing price and the trading range over a specific period.
Donchian channels: This indicator helps forex traders understand market volatility by determining the higher and lower price action values. Donchian channels are made of three lines that have been formed by calculations pertaining to moving averages. There are upper lower bands around the median one. The area that lies between upper and the lower band is the Donchian channel.
Forex indicators help traders trade in the forex market with greater confidence. The forex market behaves in particular ways under specific circumstances, and having access to indicators helps traders identify patterns and use that knowledge to make informed decisions.