Here are the 6 best indicators you should know

Every Forex trader knows that you need to supplement the data on your charts with a series of technical indicators. Commonly used indicators include strength indicators, volatility indicators, trend indicators, and cycle indicators. These indicators help us not only to determine in which market it is moving, but also when the trend is ending and we need to either leave the trade or, with a good signal, reverse the trade.

The following 6 indicators are most commonly used among Forex traders:

  • Stochastic Oscillator – A stochastic oscillator helps a trader determine the strength or weakness of a currency by comparing the closing price with a price range over a period of time. When a trader identifies high stochastics, the said currency may be overbought and you should be short or bearish. In contrast, low stochastics suggest that the currency could be oversold and you should become bullish or long.

  • Bollinger bands – Bollinger bands contain most of the currency price between the bands it displays. Each range has three lines – the bottom and top lines show price movements, and the middle line shows the average price of the currency. When the market experiences high volatility, the gap between the lower and upper band will increase. In your candlestick or bar chart, the currency is considered overbought if the bar / candlestick touches the upper range, and oversold if the bar / candlestick touches the lower range.

  • Average Directional Movement (ADX) – ADX is used to determine whether a currency is entering a new upward or downward trend. ADX is also used to determine how strong a trend is.

  • Relative Power Indicator (RSI) – RSI uses a scale from 0 to 100 to indicate the highest and lowest prices over a period of time. When currency prices rise above 70, the currency is assumed to be overbought. On the other hand, a price below 30 would most likely indicate that the currency has been oversold.

  • Simple Moving Average (SMA) – SMA is the average price of a currency for a given time period compared to other prices over the same time periods. To illustrate how the SMA works, closing prices over a 7-day period will have the SMA equal to the sum of the previous 7 closing currency prices divided by 7.

  • Moving Average Convergence / Divergence (MACD) – The MACD is another oscillator that shows the momentum of a currency relative to two moving averages. As we discussed in previous articles, when MACD lines cross, this intersection may indicate the beginning of an upward or downward trend.