While forex trading is not for the faint-hearted, it’s still possible to make profits with the right tools. To most people, the forex market is random, and trying to navigate it is similar to gambling. But that is not the case.
Various economic theories suggest that it is possible to predict forex market performance by using mathematical equations to identify trends. If you are not into maths, the best forex indicators can be your best buddy. We discuss some of the indicators below.
Forex Trading Indicators: What They are
Trading CFDs on stocks, forex, and indices can be done with a bit of help from mathematical analysis to pick out trends. This is what trading indicators do.
With the best forex trading indicator, you can examine valuable data such as volume, market sentiment, current and historical price data, and the market’s overall performance.
The main elements of the technical analysis provided include the following:
Best Forex Indicators in 2021
i) Exponential Moving Average (EMA)
This moving average indicator places a lot of weight on more recent data points that are likely to determine the future price direction. The tool is typically used for shorter periods of around 12-26 days, or even a few minutes.
Typically, you can use EMA with other indicators on newer data to better understand the trends.
ii) Bollinger Bands
Bollinger bands have become one of the most popular indicators and for a good reason. It is helpful in overly rebellious markets, but what is it about?
Typically, the forex indicator is a statistical chart that highlights the prices and volatility of a forex pair within a given time. This is very helpful in unstable markets.
The tool gives an established price range based on current levels of volatility. Usually, the nearer the bands are to one another, the less the volatility. Higher volatility is signaled by bands that are further away from each other.
Bollinger bands will also show you when the asset is trading outside its average trading levels, and so you can use this info to speculate on the long-term price changes.
You can use Bollinger bands to foretell the long-term movements in price and when an asset is likely to be oversold or overbought. It is overbought when the asset’s price is repeatedly shifting beyond the top band, and it is on the oversold camp when the price is below the band. You can then decide when to enter and when to exit the market.
iii) Relative Strength Index (RSI)
The relative strength index draws its popularity from its effectiveness as a trend indicating tool. Often classed as an oscillator, RSI identifies momentum and shows when the asset is overbought or oversold. You can use it to measure short-term trends, presenting the general health and durability of the price changes.
As an oscillator, RSI is quite effective in presenting both divergent and hidden signals in the market.
RSI quantifies the unprofitable closing value based on the closing price.
Typically, the RSI value is between 0 and 100 and depends on price fluctuations. An RSI reading of over 70 tells that an asset is overbought. Anything below 30 is in the oversold territory.
The overbought signal tells when an asset is overvalued, which often is the case after an asset has had an upward trajectory. The price does not move in this direction for long before making a u-turn. Based on this, RSI provides a better opportunity to predict reversals.
For example, an RSI movement of over 70 is a clear indication that the price is about to drop, and so you can foretell an imminent reversal and sell to lock in the gains.
On the other hand, an oversold signal is the best indicator that you should go along.
iv) Moving Average Convergence Divergence Indicator (MACD)
MACD is an essential arrow in your forex trading quiver. The tool helps pick out momentum differences in two moving averages.
Are the moving averages converging? Are they moving away from each other?
Use MACD to analyze an asset’s price action based on support and resistance levels. This information will help you know when to buy or when to sell.
MACD has three vital indicators: the signal line, which acts as a trigger to buy or sell, the MACD line to determine the gap between two moving averages; and the histogram to show the contrast between MACD and the signal line.
Typically, MACD is a favorite for many because it is dependable and straightforward to use. The tool tells a possible turning point and the strength of the trend.
v) Fibonacci Retracement
Fibonacci Retracement is the best forex indicator for identifying temporary pauses or pullbacks in the market. The pauses are sources of purchase opportunities during an upward trajectory. Use various retracement levels to determine the number and the level that the market has flipped. You can use the tool on two price points to determine the trend and set ‘take profit’ and ‘stop-loss orders. Fibonacci Retracement is one of the most effective tools if you are looking for opportunities to enter the market.
vi) Simple Moving Average Indicator (SMA)
To succeed in forex trading, the latest price trends must be at your fingertips. A moving average is your best bet as it singles out a price trend direction and does this while removing any distractions from short-term fluctuations.
With a moving average, you can see the current and any emerging trends. Most people prefer to use multiple time frames to generate moving averages. You can tell the direction the price is moving with a simple moving average.
The tool identifies vital price points within a given time. No doubt, the moving average indicator is a rudimentary technical analysis device. But its simplicity makes it one of the best.
The simple average indicator creates a single trend line using the division of totals with data points. But you are free to choose a time frame to focus on and determine price patterns.
When the market is taking a nosedive, the moving average can act as resistance or support when the market is on an upward trajectory. And since you can customize the tool to a particular time frame, the moving average indicator can be effective for short-term and long-term trends.
The moving average is versatile, and you can use it with others, such as chart analysis.
vii) Stochastic Oscillator
Stochastic Oscillator combines the strength of the trend and momentum to provide insights into the market. The momentum indicator compares the price ranges over a particular time frame with the closing price. This information helps you know when the market is oversold or overbought. An oversold market usually has an under 20 reading, while the reading for the overbought category is over 80.
Tread carefully when you see a definite trend. It does not always translate to an anticipated market correction. Intelligent forex traders use a host of forex indicators to confirm their findings.
For its simplicity and a strong level of accuracy, most people agree that the Stochastic Oscillator is one of the best forex indicators in 2021.
Having a crack at forex may not be an easy money-making activity as some think. But that does not stop people from succeeding in it, especially with effective technical indicators.
Forex trading has moved from pure speculation to make profits to a more viable activity, and it’s thanks to a plethora of tools available. Forex indicators use mathematical equations to reveal hidden trends that you use to guide your next action. As a beginner in forex trading, the best place to start is learning how different technical indicators work and ride them into the sunset in profits.
Who can Use Trading Indicators?
Any technical trader needs trading indicators in their arsenal to navigate the murky waters of the forex market. The tools help you understand what is happening and where everything is headed. With this information at your fingertips, you can take actions that prove profitable for you. Adding indicators to your trading strategy is a smart move, especially in the current unpredictable markets. But not all trading indicators are good for you. Some just don't fit your trading style, skill, and experience. As a beginner, try several different demo accounts to find one that you are most comfortable with. Besides, there are numerous online classes for any topic, and forex indicators are not an exception. Take the course and practice with demo accounts before making the big plunge into the market.
Which is the Best Forex Indicator to Spot Trends?
Relative Strength Index (RSI) and MACD are fantastic tools for picking out trends. Another popular choice is moving averages.