When trading the forex market, you’re going to need at least one technical indicator to help you along. Staring at the charts won’t be enough in its own, but fortunately, there are many such indicators made just for this purpose. The most popular of them will be available on all trading platforms, but there will even be those that are custom created by individuals. What this means is, there are a lot of options, more than any one person can master, but you don’t need to know them all. In fact, these 3 basic smart indicators may be enough to help you get started:
It is probably the most common indicator in the industry, and is used by all traders regardless of experience. the moving average indicator even works on all financial markets including stocks, commodities, etc. A moving average is indicated by a single line across the candlesticks on the trading platform. To generate this line, mathematical algorithms add the closing prices of each trading period, then calculate the average based on the number of periods counted.
In the end, the moving average is used to identify trend direction. While the moving average line is moving upwards, the markets are in an uptrend, and vice versa. Therefore, as long as the line is sloping upwards, you should be looking for buying opportunities, and vice versa. Besides the general trend, moving averages are also used to identify trend reversals when they cross the candlesticks. For example, if after trending upwards for some time, the prices move down, crossing the moving average to the downside, that would indicate that the trend direction has just shifted.
Moving average convergence divergence (MACD)
The MACD combines the properties of two moving averages, and with that come several uses for the indicator. The two moving averages constitute one slow moving average and one fast moving average to provide a bigger picture of the markets. The fast moving average reacts faster to market changes, while the slow one lags behind. This relationship helps to identify trend changes in the markets. For example, when an uptrend turns to the downside, the faster moving average reacts first, crossing the slow one downwards. A cross between the two moving averages is usually a very strong trading signal.
Besides trend changes, the MACD shows market sentiment. The two moving averages oscillate around the zero (0) mark to show market sentiment. As long as the MACD is below zero (0), market sentiment is bearish, so you should be looking for selling opportunities and vice versa.
Relative strength index (RSI)
This is perhaps the easiest indicator to understand, and that’s because it was designed to be so. When you add this indicator to your trading platform, it’s going to appear below the price charts as a single line. In this indicator window, the levels will also be marked from 0 to 100, with levels 30 and 70 dotted across for emphasis. Unlike the moving average that tracks the trend direction, the RSI will track the extent of every market move, either upwards or downwards. It works under the principle that markets will correct themselves whenever there is a rapid shift in either direction.
For example, a very strong and fast move upwards will often be followed by a move downwards. To indicate the extent of market moves, the levels from 0 to 100 will represent the strength of market moves either downwards or upwards. Strong downward moves push the RSI lower and vice versa. When the RSI is above 70, it indicates the possibility of a market correction downwards because the markets are overbought and vice versa.
With just these 3 smart indicators, you can begin to understand the various market movements, either in a trend or in range.