Many new traders are unaware of the term technical indicator and its role in forex trading. However, technical indicators are one such tool with which a trader can understand the pricing movements on a better level.
These indicators help identify forex trends and assess the market under the situations of overbought/oversold. In addition, there are various technical indicators, which range from simple ones to complex.
In short, with the help of technical indicators, traders can identify exit/entry rules to keep their emotions under control and design a more robust trading plan.
This guide explains the top 5 technical indicators in Forex trading that a trader should know about.
List of Top 5 technical indicators for forex trading
1. Moving averages
On the top, we have the most recommended technical indicator, namely moving averages. This technical indicator plays an important role in identifying the latest pricing trends in a forex market.
For instance, if the short-term moving average crosses the long-term moving average, this will signify an uptrend. Traders can also use moving averages for spotting trend reversal.
2. Moving average convergence divergence (MACD)
MCAD technical indicator is based on the MCAD line, the primary difference between two moving averages. It also includes signal lines and histograms. Both of them represent the signal line and MCAD line.
MCAD line is defined as the faster line. It will react quite quickly to different price movements. When the MCAD line crosses the signal line, which is the slower line, the crossover will point out the start of the latest trend.
3. RSI (Relative Strength Indicator)
Third, we have RSI, abbreviated as Relative Strength Indicator. With the help of this technical indicator, traders can figure out if the currency pair is oversold or overbought. RSI oscillates between the levels of 0 to 100.
If the value is between 0-and 30, it will indicate that the pair of currencies is oversold. But if the value is between 70 and 100, it will signal that the currency pair is overbought.
Traders can make use of this indicator in different manners. First, any trader planning to trade the reversal can wait for the RSI to enter the oversold or overbought territory.
RSI is also common for spotting the divergences between the price action and oscillator.
4. ADX (Average Directional Index)
ADX works as the trend-following indicator with which a trader can measure the weakness and strengths of certain instruments’ price movements. The trend will be stronger if the value is larger. The same goes for the smaller values.
Any value which is above the 2 indicates the trending market. A most popular technical indicator can also be combined with a few other indicators to create a powerful trading system.
5. Bollinger Band
Last we have the Bollinger Bands indicator, lower and upper bands. It even plots two different standard deviations away from the simple moving average.
Narrow bands will indicate reduced volatility, and wide bands will display increased volatility.
All the technical indicators mentioned above are significant for giving an efficient performance in forex trading. The effectiveness of any indicator will depend upon how you are using it.