Here are the top 6 indicators you should know

Every Forex trader knows that you need to supplement the information in your charts with a number of technical indicators. Commonly used indicators include strength indicators, volatility indicators, trend indicators and cycle indicators. These indicators not only help us determine in which market it is moving, but also when the trend will end soon and we should 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 – The Stochastic Oscillator helps the trader determine the strength or weakness of a currency by comparing the closing price with the price range over a period of time. When a trader identifies a high stochastic level, the specified currency may be overbought and you should go short or down. Conversely, a low stochastic indicates that the currency may have been oversold and that you should go for bullish or long-term growth.

  • Bollinger Belts – Bollinger Belts contain most of the price of the currency between the ranges it displays. Each belt 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 belts will increase. In your candlestick or bar chart, the currency is considered overbought if the bar / candlestick touches the upper belt and resold if the bar / candlestick touches the lower belt.

  • 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 price in a given 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 resold.

  • Simple Moving Average (SMA) – SMA is the average price of a currency for a given time period compared to other prices during the same time period. To illustrate how the SMA works, closing prices over a period of 7 days will have the SMA equal to the sum of the previous 7 closing prices of currencies 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 intersect, that intersection may indicate the beginning of an upward or downward trend.