Forex indicators and Forex trading has become a popular trading market. Investors and traders make a lot of money out of this market with different techniques. Either they use short-term strategies like scalping or they go for the big picture with long-term plannings. But whichever strategy they follow, they have to consider the volatility of the market.
Random shifts in the price can occur at any moment. But luckily, they don’t appear out of the blue. There are some factors like economical and technical factors that actively bring these shifts in the forex price. There aren’t any indicators for economical factors, but we have many technical indicators. These indicators help us predict the forthcoming changes in the forex market.
Now there are many indicators in the market for tracking different technical factors of the forex market. But should you use all of them together? Filling your dashboard with all these indicators will lead to confusion. Alone, they are not helpful at all either. So, what should you do? Some wise traders suggest keeping only a few indicators in your dashboards. But which should you keep? Let us introduce you to the three most important forex indicators.
Most Important Forex Indicators
Moving Average – Trend identifier
One of the most important technical analyses is trend identification. It is basically the direction the price is moving. Is it going up or down? The most common indicator used to identify the trend is the moving average.
Technically speaking, the moving average shows the average movement of price over time. The time could be a couple of hours, days, weeks, or even months. The bigger the period is, the lesser price noise will be.
Price noises are temporary shortfalls of prices that get corrected after a short period.
You must know that the moving average does not predict future movements. Rather, it gives you a slight idea of where the price curve may change its direction. It gives you an idea of where the resistance and support level is for your currency pair. That’s basically all about moving the average’s function.
How does it help you? By analyzing the historical data of the market trend, you can get a basic understanding of how the market will change direction. You can use that knowledge to understand when to buy and when to sell. That is basically the functionality of using a trend identifier tool. It can be used separately, as many experts do. But it’s safe to use three to four indicators to make a decision.
Moving Average Convergence/Divergence – Trend Confirmer
As we said earlier, it is safe to use more than one indicator for forex trading. We have talked about trend identifiers. But the problem with trend identifiers is that they sometimes give away wrong indications. The forex market is driven by many forces and trend identifiers like Moving average are very volatile to these forces. So, we need another indicator to confirm the results of our trend identifier.
The best indicator to support the Trend identifier is Moving Average Convergence/Divergence (MACD). It shows the phase of the market. What does that mean? Simply speaking, everything in this universe is driven by force, and sometimes this force needs rest. MACD identifies the moving force of the forex market and sees how much strength it has left. It shows when it needs rest. When it rests, the market price will start falling.
If both the trend identifier and the trend confirmer are showing the same result, then you can rely on them. For example, if both of them are showing bullish results (market-moving direction is upwards), you should enter the market and go for a long-term investment in forex. But if both of them are bearish (market-moving direction is downwards), then you should either withdraw your long-term investment or you should make money with short-term strategies like forex scalping.
Bollinger Bands – Volatility measurer
Bollinger bands help to measure the degree of variation in a trading price. It helps to measure the volatility of a market. It can also function as a profit-making tool. So, how does this tool work?
The Bollinger bands consist of three bands and each band is a moving average (MA). Usually, the one in the middle is a 20 period SMA. This band is surrounded by two standard deviation bands. The upper and lower band work as borders for the middle band. The middle band fluctuates in value in between these two borders. In time, the borders get closer/ narrower or they get farther/ wider. The narrower they are, the less volatile the market becomes because the middle band has less space to move.
On the other hand, wider space means the market is more volatile because the middle band has more space to move. Sometimes, the middle band/price moves above and below the border bands. The interpretation of this is that when the price moves above the upper band, it is a sell indication. And when the opposite happens/ price goes down the lower band, it is a buy indication. Meaning, you should buy at that moment. After buying, wait for the price to go up the upper band and then sell it to take profit. The wider the border gets, the more profit you can take – you have to incur more risks too.
Conclusion of the most important forex indicators
So, these are the most important forex indicators you should consider to make your move on the data. You should keep in mind that the forex market is very susceptible to economic change. The shift also depends on the demand of buyers and the supply of sellers. These things change randomly and, sometimes, indicators fail to identify them. So, don’t get frustrated if things don’t turn out as planned because, as wise traders say, don’t blame the indicators. They are just a number and reality is more than numbers. You should try them out with a demo account to get an idea of how they work and then go into the real forex market.