Forex indicators are statistical tools that are used by technical analysts to interpret price data and generate tradable buy and sell signals. The forex market tends to behave in specific ways under certain circumstances. Because the behavior is repetitive, certain patterns do occur time after time.
The best forex indicators identify these patterns as they arise. Top Forex brokers that provide a reliable trading platform are essential for the success of both retail and institutional forex traders.
The forex market is the world’s largest market in terms of daily transaction volume, with a trading volume of more than USD 5.3 trillion per day. This market is open 24 hours a day, offers traders significant liquidity which helps in protecting traders from price manipulation.
We shall now review some of the most popular forex trading indicators to get an overview of the kind of market conditions they are most suitable for. Forex Trading quotes are often analyzed along with these indicators.
• The Simple Moving Average or SMA represents the average (arithmetic mean) closing price over a certain number of days. This indicator has only two variables involved in its computation – period and price. Forex Trading Brokers use this indicator, sometimes together with another SMA for a different period, to signal confirmation of a change in price behavior. The more extended the period of SMA (values over 20 are normally better when dealing with longer trend lines), the higher the smoothing and the slower the reaction to changes in the market.
• The Moving Average Divergence-Convergence, or MACD, the indicator is designed to gauge momentum. Apart from identifying a trend, MACD also attempts to measure the strength of the trend. This indicator first measures the difference between two exponentially smoothed moving averages. This difference is then smoothened and compared to a moving average of its own. The forex trading process is a complex one with various directions.
• Relative Strength Index or RSI indicator calculates the cumulative sum of up days and down days over the window period and calculates a value that can range from 0 to 100 (a reading of 50 is considered neutral). It measures the relative changes that occur between higher and lower closing prices. This index is used by the traders to determine overbought (values exceeding 85) and oversold conditions (if the curve dips below 15).
• Bollinger bands indicator is used by the traders to anticipate increases (band widens) and decreases (band narrows) in volatility by taking the standard deviation of price-data changes over a period. The source of Forex trading rates becomes important. It then subtracts it from the average closing price over that same time frame to create trading bands. This indicator is more useful as a profit-making tool.
Many of these techniques are also used by the traders to undertake forex reverse trading – doing precisely the opposite of what the signals tell him to do.
For learning forex trading basics, it is recommended to start studying these signals which are the simplest way to draw out patterns. TradeFW is one of the most known forex trading services for this followed by S2trade – which is trusted and known for CFDs (Contract for Difference). Various other popular names are eTORO (best for social, copy trading), Swissquote (crypto, banking), CMC markets – best currency offering, FxPro – best for meta trader and Forex.com to name a few.
There are also various forex trading services which train clients in not just making investments but reading the signals and gauging the rates with accuracy over a period of time.