Top 10 Forex Indicators That Every Trader Should Know
Indicators are considered essential when trading in the forex market. Several forex traders use these indicators daily, which helps them understand when they can buy or sell in the forex market. These indicators are known as an important part of technical analysis, and every technical or fundamental analyst should be aware of these indicators. Here are the top 10 forex indicators that every trader should know:
Moving Average (MA)
Moving average (MA) is a crucial forex indicator that indicates the average price value over a particular period that has been chosen.
If the price trades are above the moving average, it means buyers are controlling the price, and If the price trades are below the moving average, it means sellers are controlling the price.
Therefore in trading strategy, a trader should focus on buy trades if the price is above the moving average. The moving average is one of the best forex indicators that every trader should know.
Bollinger Bands
When it comes to measuring the price volatility of a particular security, the Bollinger bands indicator is used to determine the entry and exit points for a trade.
Bollinger bands come in three parts, the upper, middle, and lower brands. These bands are often used to determine overbought and oversold conditions.
The best part about this indicator is that it helps characterize the price and volatility over time of a financial instrument.
Average True Range (ATR)
The Average True Range indicator is used to measure the market volatility. The key element in this indictor is the range, and the distinction between periodic low and high is called range.
The range can be applied on any trading period, such as intraday or multi-day. In the Average True Range, there is a use of the true range.
True range is the biggest of three measures:
1) Current high to low period
2) Previous close to current high period
3) Prior close to current low period
The absolute value of the biggest of the three ranges is called the true range. However, the average true range (ATR) is the moving average of specific true range values.
Moving average convergence/divergence or MACD
This is one of those indicators that tell the force that is driving in the forex market. In addition, this indicator helps identify when the market will stop in a particular direction and will go 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 current data gets larger importance. However, the formula of MACD is MACD = 12 Period EMA - 26 Period EMA.
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Fibonacci
Fibonacci is another excellent forex indicator that indicates the exact direction of the market, and it is the golden ratio called 1.618.
Several forex traders use this tool to identify areas and reversals where profit can be taken easily. 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 retracement levels of Fibonacci are plotted to find areas to which markets may retrace before moving back to the trend that the movement in the first price has created.
Relative Strength Index (RSI)
The RSI is another forex indicator that belongs to the oscillator category. It is known to be the most commonly used forex indicator and showcases an oversold or overbought condition in the market that is temporary.
The RSI value of more than 70 shows an overbought market, while a value lower than 30 shows an oversold market. Thus, several traders use 80 RSI value as the reading for overbought conditions and 20 RSI value for the oversold market.
Pivot Point
This forex indicator showcases the demand-supply balance levels of a pair of currencies. If the price reaches the pivot point level, the demand and supply of that particular paid are at an equal level.
If the price crosses the pivot point level, it shows higher demand for a currency pair, and if the price falls below the pivot point level, it shows a higher supply for a currency pair.
Stochastic
Stochastic is considered one of the top forex indicators that help traders identify momentum and overbought/oversold zones.
In forex trading, the stochastic oscillator helps recognize any trends that are likely to be a reversal. A stochastic indicator can measure the momentum by comparing the closing price and the trading range over a certain period.
Donchian Channels
This indicator helps several forex traders understand the market's volatility by determining the higher and lower price action values.
Donchian channels are usually made of three different 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 the upper and the lower band is the Donchian channel.
Parabolic SAR
The parabolic stop and reverse (PSAR) is a forex indicator used by forex traders to arrive at the direction of a trend, assess short term reversal points of a price.
This indicator is mainly used to find spot entry and exit positions. 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 indicates that the price is moving up. Conversely, if the dot is over the price, it indicates that the price is moving down.
FAQS
- What is Relative Strength Index (RSI)?
- What are the roles of buyers and traders in Moving Average?
- What is Fibonacci?
The RSI is another forex indicator that belongs to the oscillator category. It is known to be the most commonly used forex indicator and showcases an oversold or overbought condition in the market that is temporary.
If the price trades are above the moving average, it means buyers are controlling the price, and If the price trades are below the moving average, it means sellers are controlling the price.
Fibonacci is another excellent forex indicator that indicates the exact direction of the market, and it is the golden ratio called 1.618.
Several forex traders use this tool to identify areas and reversals where profit can be taken easily. 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.
