Indicators are instrument utilized by technical analysts and forex traders in the financial markets to approach forex trading statistically instead of approaching trading subjectively. Indictors include things like money flow, volatility, momentum, and trends which offer to traders some idea about which direction the price of currencies would move. The available indictors are as many as hundreds to thousands. Thus, there are lots of controversies consigning which indicators are the best.
Leading indicators are among the two main forms of forex trading indicators. They commonly occur before there is any perceptible movement of price and forecast the forthcoming currency prices. They have the tendency to be utilized for range bound trading, because they provide some clue regarding a forthcoming increase in the value of a currency.
Examples of leading indicators are the Stochastic Oscillator and the Relative Strength Indicator (RSI). The disadvantage leading indicators is that they can “sometimes provide false signals. Thus, most traders use leading indicators in conjunction with other indicators while the price action serves as their main indicator.
As opposed to leading indicators, lagging indicators come after the price movements. They are commonly used when the market is trending and the trend is properly defined. This is because their signal comes commonly after that of the leading indicators. They are not as profitable as the leading indicators but they tend to provide more reliable clue to the direction of the market. Examples of lagging indicators are Bollinger Bands and the Moving Averages. For instance, a moving average is obtained by estimating the average price of the previous “N” candles, which characterize the lag of the present price. Nevertheless when the market is trending, it is an indication that the average price is moving up or down.
Different ways of creating Indicators:
Oscillators are the technical indicators that are most popular and most commonly utilized. They occur in a form of range. Frequently, full ranges exist between two values that stand for both overbought and oversold situations. Examples of oscillators are the Stochastic Oscillator, Moving Average Convergence Divergence (MACD) and the Commodity Channel Index (CCI).
Non-bounded Or non-oscillatory indicators
This type of indicators are less common but they are as well utilized in the forex market to demonstrated the how weak and strong a trend is. As opposed to oscillators, they are non- bound within any specific range. An instance of this is the buildup /circulation line indicator that estimates the flow of money into a security. Nevertheless, in the Forex market, this is nearly impossible to estimate despite the fact that a few differences of volume are provided by Forex brokers, with the data from their proprietary servers.
The use of indicators
There are a few trading systems that only utilize indicators but they are not used frequently. An example of indicators that is commonly used is the moving average crossover system which is a graphical representation of not less than two moving averages on a chart.
One of the moving averages is commonly slower one while the other one is the faster one. The faster moving average is usually made up of smaller numbers of candles since the rote would be altered shortly. The longer Moving Average is more stable and slower.
When the fast moving average moves above the slow moving average, the implication is that the momentum is likely shifting upwards indicating a good position to place a buying order. On the other hand when the moving average falls underneath the fast moving average, it gives traders a sign to place selling orders. Trading with the moving average crossover structure, makes the trader to watch the market regularly to buy or sell their currency pairs as soon as the moving average crosses above or below these lines. The greatest issue with trading this way is you require a strong trend for this to be beneficial. Trading this way when the market is moving sideways can result to a huge loss.
It is commonly recommended to stay safe while trading with the moving averages to use it together with the support and resistance indicators since; it offers a lot of ways to confirm the trade. A standard instance is to seek for support. This means a specific candle stick formation that helps to confirm the observed move and also the formation of a buy signal on the Stochastic Oscillator.