Which Forex Indicators should we use?

Jul 12 • Forex Indicators, Forex Trading Articles • 1424 Views • Comments Off on Which Forex Indicators should we use?

Forex indicators are ideally supposed to help traders make the difficult decision-making process in forex trading easy. These technical analysis tools are supposed to help them decide which currency pair to buy or sell as well as to determine entry and exit points for each trade. For the last 100 years, technical analysts have been developing various technical tools and indicators in their attempt to capture market predictability albeit with very little success. If we are to gauge the usefulness of these technical tools on the number of forex traders losing money versus those who make money, we can safely conclude that these tools really appear to have little value. About 65% of forex traders serve as the milking cows of the other 35% in 2010, according to statistics published by MSN Money. Apparently, success remains largely elusive for the majority of retail traders even with the availability of these technical tools and indicators.

But hold your horses first before you totally relegate forex indicators to the sidelines. These indicators offer some great trading opportunities which only a few are able to recognize. Some of these indicators are popularly used by quite a large number of forex traders for their entry and exit trades. Collectively, their numbers are large enough to make prices stall or momentarily rampage in a single direction. Knowing and understanding the technical indicators popularly used by most traders will cut you an edge since you will always have an idea what price action points they are focusing on  and where they are most likely to make a move.

The idea of studying and understanding the popular forex indicators commonly used by many of the forex traders is not to trade based on the raw recommendations coming out from these technical tools. The idea is not to become a technical trader yourself. The idea is to become aware of certain price levels or resistance and support lines that are being watched by most traders. The idea is not necessarily to analyze the forex market movements yourself but to have a feel of how the majority of the traders look at a certain price levels. And if and when they do make a move in the market, the idea is to develop a keen sensitivity to their underlying sentiments and merely hitch a free ride where ever the majority of the forex traders are taking the price.

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Currency rates, like all other market prices, discount all underlying fundamentals. But fundamentals do not necessarily move the prices. The traders do. They buy and sell, and move prices depending on how they view the fundamentals. The key then is to be able to develop the ability to read their sentiments. And, it will help a lot to know the possible price action points where they are likely to make a move. That is why it is important to know the most popular forex indicators they use.

Among the more commonly used and popular forex indicators you should watch include:

  • MACD or Moving Average Divergence Convergence – This is a momentum oscillator that calculates the difference between two exponential moving averages.
  • OBV or On Balance Volume – This is a simple way of showing if money is flowing in or out of a particular currency pair. It combines price and volume studies.
  • RSI or Relative Strength Index – This portrays the strengthening or weakening of prices as it trudges through its current direction.
  • MFI or Money Flow Index – This is the volume weighted version of RSI and shows the all important shifts in buying and selling pressures.
  • Pivot Points – This shows where the possible reversal points are (usually below the price in an uptrend or above the price in a downtrend.
  • Ichimoku Clouds – A relatively new, yet popular indicator that clearly identifies the trend direction and establish where the resistance and support lines are. It also gauges momentum and it generates buy and sell signals.

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