We take a look at some of the best indicators you can use on your forex charts as a beginner.
In technical analysis, the traders are constantly computing and plotting mathematical quantities relying on observable market factors like volume and price. This helps them to know the present or past condition of the market. Technical traders make use of the various recognizable patterns of the technical indicators created as a result of these calculations to predict what the market is going to do next and also generate buy and sell signals. Now even though these technical indicators are very important to forex traders, their effectiveness is watered down if there are many of them on a forex chart. So in other to ensure fast trading decisions, it is important for the trader to reduce the number of indicators being watched.
Popular technical indicators on forex charts
Here is a set of commonly used technical indicators that will set you on your way to adequately analysing the market:
Moving Averages
With moving averages, traders simply put together the average price movement over a certain period of time. This average is then attached to the present price action so that the indicator continues moving with the close of every bar. The effect of this is that it helps in smoothing out the price data so that trends can be easily identified. There are several types of moving averages you can have on your forex charts. These include the simple moving average, the exponential moving average and the weighted moving averages. This indicator is naturally a lagging indicator and thus has very little predictive power.
To battle this lagging nature, many traders use the cross over between a slow moving average and a fast moving average as trade signal. When the slower moving average crosses to the top of the faster moving average, it signifies a bullish entry. When it crosses below it, it signifies a bearish signal.
Oscillators
Oscillators normally give a trader an indication of what the momentum is like on various pairs. It equally shows overbought and oversold market conditions. Banded oscillators are those measured on a scale of 0-100%. When an oscillator shows divergence relative to present price action, it shows strong possibility of market reversals.
The RSI (Relative strength index)
The relative strength index is one of the most popular oscillators in use by many traders today. It is an indicator that is used in determining overbought and oversold market conditions. It fluctuates between 0 and 100 so it is referred to as a banded momentum oscillator. As soon as the index reads above 70, the market is overbought and as soon as it goes below 30, the market is oversold. Traders can equally use this indicator to watch out for possible price reversals by looking out for hidden divergence.
The Stochastics
This is another popular indicator that is used by many traders in different ways. However, the basic principle behind it is that when in a downtrend, the market closes around the lower areas of the day’s trading range showing bearish momentum. In the same vein, when in an uptrend the market closes in the upper part of the day’s range indicating an upward momentum.
With these basic indicators, you can kick-start your trading experience.
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