The secret of many successful currency traders is their familiarity with the various forex analysis indicators as well as the most appropriate scenarios in which they should be used. These indicators will help a trader determine just when to enter or exit a profit-making trade. Here are four market indicators that every currency trader must be familiar with if he wants to make money in the markets.
- The Moving Average Crossover. The moving average of a currency shows its average exchange rate over a specified period in order to identify possible trends as well as defining possible support and resistance levels. When the price breaks through, or ‘crosses over’ the signal line generated by the moving average, then the trader may have identified a signal to buy or sell the currency. This is considered a trend-following forex analysis tool, since it allows traders to identify the direction in which a major trend is moving so they can profit from it by buying in.
- The Moving Average Convergence Divergence (MACD). This forex analysis indicator is generally used to confirm the direction of a trend. It works by comparing two moving averages, one short-term and the other with a longer-term. Although traders can choose any two time periods, for simplicity’s sake they generally rely on the default periods of 12-days and 26-days. The difference between the two is plotted on a chart and then a shorter-period moving average is taken and also graphed. This is known as the signal line. When the MACD is above the signal line, it indicates an uptrend; if the opposite, then it indicates a downtrend.
- The Relative Strength Index (RSI). One of the major concerns of currency traders is whether the price of a particular currency has been distorted because it is overbought or oversold, which makes the exchange rate artificially high or artificially low. In order to determine if the price of a currency is overbought or oversold, traders use the Relative Strength Index forex analysis indicator, which uses a formula to calculate the cumulative sums of days when the currency closed up and when it closed down. The result is an RSI from zero to 100; the closer the indicator to 100 the price action is going up while if the RSI moves towards zero, the price action is going down. If the RSI is 50, then the reading is neutral.
- Bollinger Bands. The most useful forex analysis indicators are the ones that tell a trader when it is time to take a profit rather than hold their current position. Bollinger Bands do this by charting the movement of price action. They consist of an exponential moving average with two price channels on top of and underneath it. When the price line (the middle band) touches the upper band, then a trader currently holding some currency may consider taking a profit by selling it; on the other hand, if the price line moves toward the lower band, it is an indicator that if they are holding a short position, they should buy currency and take the profit.
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