How do traders avoid the worst-case scenarios when trading? It’s both simple and complicated: They analyze the market.
There are two significant ways to do that: fundamentally and technically. Fundamental analysis uses economic data, while technical analysis utilizes charts to detect price movements. Most traders perform technical analysis more often.
In line with this, technical indicators are used for more accessible and better analysis. This article will discuss everything you need to know about technical indicators, so you can use them to make the right trading decisions.
What Are Technical Indicators?
The charts and the market, in general, aren’t always easy to read and understand. If you’ve encountered other traders who trade with Ichimoku cloud or MACD, they’re talking about trading with technical indicators. Technical indicators are mathematical trading tools that analyze any of the following aspects of the market:
- Open and closing prices
- Highs and lows
Technical indicators interpret the Forex market by utilizing historical data regarding prices, movements, and volume to predict future movements and signal traders. They’re based on calculations and are plotted graphically as chart patterns.
Types of Forex Technical Indicators
There are numerous technical indicators, and each of them provides unique and valuable information. However, they can be identified into four major categories: trend, volatility, momentum, and volume.
Forex Trend Indicators
From its name, trend indicators follow and identify trends, uptrend or downtrend, of a currency pair in the market. Many traders use this indicator type because there are higher chances of a successful trade when currency pairs are trending. To improve your portfolio, it’s crucial that you know when a currency pair is trending and not.
The primary purpose of trend indicators isn’t to accurately pinpoint the exact entry and exit points, but to show direction, whether to buy or sell. However, it would be an advantage if you’ll be able to enter a trade right after a trend begins and exit after it ends. Some of the best examples of technical trend indicators include:
- Moving averages
- Ichimoku cloud
- Average directional index (ADI)
These technical indicators measure and identify how far the price stretches from its mean price, higher and lower. They help gauge periods of high and low volatility in the market. Increased or high volatility means the movements are less certain and unsure. It’s very likely for the movement to change directions and move rapidly suddenly.
If you plan to make trades based on market trends, you should be aware of the volatility. You don’t want to be caught in a price movement you didn’t anticipate. Some of the most common examples of technical volatility indicators are:
- Bollinger bands
- Average true range (ATR)
- Keltner channel
Momentum Technical Indicators
Momentum indicators are often called oscillators and can help pinpoint overbought and oversold conditions. It’s considered to be overbought if an oscillator moves too high and oversold if it moves too low. Momentum indicators imply the development of the momentum of a particular currency pair. Specifically, oscillators can show the price movements’ strength, magnitude, and velocity and move in the same direction as the price.
Like oscillators, these indicators move back and forth as the price rises and falls. Like other indicators, a momentum indicator can be partnered with other types of indicators. In line with this, if you use it with a trend indicator, you can determine the start and end of a trend. Some examples of this type of indicator include:
- Relative strength index (RSI)
- Moving average convergence divergence (MACD)
As implied by its name, these indicators show the volumes of trades behind a particular price movement. However, since currency pairs are traded over-the-counter and not on a central exchange market, volume transactions aren’t available. It’s impossible to measure the total volume since there are no clearing locations to recalculate these volumes.
The volumes you encounter at platforms are from your broker’s own data and can’t simply represent and report the total global volume. Nonetheless, there are still traders who use this type of indicator. Some technical indicators under this type include:
- On balance volume (OBV)
- Money flow index (MFI)
Tips on Using Technical Indicators in Forex Trading
Since there are various types of indicators, it’s best to know how to use them efficiently when trading. Here are some tips for using your indicators more effectively:
- Use an indicator alongside another indicator. For example, use Moving Average with Relative Strength Index.
- Don’t use indicators of the same type. Although there are lots available, look out for the ones you plan to use. For example, don’t use a momentum indicator with another momentum indicator. They perform and give the same information.
- Don’t use too many indicators simultaneously. Keep your charts clean and the number of indicators at a minimum.
Technical analysis is an excellent way to study the market to make good trading decisions. There are many indicators available for use, and it’s best you know how each type functions to attain efficient trading.