The Forex or currency market is one of the most popular markets for retail traders. Highly liquid, open 24h a day from Sunday to Friday, easily accessible, and adapted for any kind of trading style (scalping, day trading, news trading, swing trading, currency carry trade…), the Forex market attracts an increasing number of participants every year. What about you?
If you’ve decided to enter the Forex market, the first step is to learn how to trade Forex and decide which trading strategy you will use to trade currency pairs. When determining which trading configurations and set-ups to follow to open and close FX positions, you can rely on technical analysis, which is one of the most popular methods to analyze the markets.
As technical analysis is based on the price action for forecasting where an asset price will go next, you need to know how to read charts. Most importantly, you need to know which technical indicators are the most monitored and used by FX traders, so you can develop your trading edge when working on your strategy.
What are technical indicators?
A technical indicator is a mathematical formula based on an asset price, volume, or open interest providing key information for technical traders to predict future price movements. Some technical indicators are displayed directly on a chart on top of the price (overlays), while others are displayed above or below the chart and move between two values (oscillators).
There are also different types of indicators you can use depending on the kind of information you want to exploit. You can find trend indicators, momentum indicators, volume indicators, and volatility indicators, for instance.
Finally, you can also find two categories of indicators – leading and lagging. Leading indicators are indicators that try to predict price movements and provide trading signals when a trend is starting. On the other hand, lagging indicators are indicators that provide signals after a movement, because they follow the price action.
Top 3 technical indicators every Forex trader should know about
Moving averages are one of the most popular trend-following indicators, which allow its users to quickly identify the current trend and potential trend reversals. Moving averages can also be used to spot support and resistance zones. Many traders like to create moving averages trading systems with two moving averages (one short and one long), where crossovers provide buying or selling signals.
Relative Strength Index (RSI)
The RSI is the most popular momentum oscillator for identifying extreme price situations that could trigger reversals. RSI gauges the magnitude of an asset’s average gains and losses over a defined time period to determine its strength and weakness. By indicating overbought (RSI>70) and oversold (RSI<30) conditions, the RSI helps traders to forecast reversals.
Moving Average Convergence Divergence (MACD)
The MACD is both a trend and momentum indicator that uses the convergence and divergence of two moving averages to show when prices are changing direction faster than the standard moving average. Composed of a MACD line, which displays the difference between two exponential moving averages, a signal line, which is the exponential moving average of the MACD line, and a MACD histogram, which pictures the distance between both lines, traders mostly get trading signals from when the two lines crossover.