Forex trading indicators are subgroups of technical indicators used by forex traders to foretell the bearing of major currencies/ currency pairs and groups of securities. A majority of forex trading indicators are generated by analyzing the number of companies that have attained novel highs in the number of companies that produced new lows.
Forex trading indicators have the total capability to show where the overall trend is headed. They have the ability to apply a statistical formula to a good number of data points in other to reach a conclusion. These indicators can either use data points from multiple securities or currencies (market indicators) or from a single security (technical indicators).
TYPES OF FOREX TRADING INDICATORS
TREND FOLLOWING TOOL
Trend following tools are forex trading indicators that provide forex traders with an easier methodology for identifying the direction of major forex trends thereby attempting to make profits by trading the direction of the trend. Some forex traders make use of trend following tools as a separate forex trading system while most traders use it to make major forex trading decisions on whether to enter a long position or a short position. The moving average crossover is a major trend following tool. A simple moving average crossover signifies the average closing price in the space of a certain number of days.
TREND CONFIRMATION TOOL
After the use of a trend following tool as a forex trading indicator which is used to identify whether the major trend of a particular currency pair is up or down, a trader must confirm its reliability and this is where a trend confirmation tool comes into play. This forex trading indicator proves that trend following tools are prone to be whipsawed. A trend confirmation tool is used by forex traders to estimate whether the current trend following indicator is accurate or not. Although a trend confirmation tool may or may not be capable of producing specific buy and sell signals, they are used to identify if the trend following indicator is in correlation with the trend confirmation indicator.
By so doing, if both the trend following tool and the trend confirmation tool are in agreement, then forex traders can confidently consider the option of venturing into a long trade with the selected currency pair in question. A very good example of a trend confirmation tool as a forex trading indicator is known as the moving average convergence divergence. This forex trading indicator functions by measuring the variance between two exponentially smoothed moving averages. The difference or variance is then smoothed and matched to a moving average of its own. An uptrend is confirmed and termed positive when a smoothed average is above its own moving average while its termed negative when the current smoothed average is below its moving average and at this range, a downtrend is confirmed.
In a round up, when the trend following moving average combination is bearish indicating a short term average being below the long term average and the moving average convergence divergence is negative, the trend confirmation tool as a forex trading indicator will portray a downtrend.
AN OVERBOUGHT/ OVERSOLD TOOL
After making the decision of following the direction of a major trend, a forex trader must further decide on whether he or she is comfortable on taking up the trade immediately a clear trend is established or engage in trade after the occurrence of a pullback. However, if the trend is seen to be bullish, the forex trader will be left to make a choice of either buying into strength or buying into weakness. Therefore, if a forex trader decides to get in immediately, he/she can consider venturing into a trade as soon as an uptrend or downtrend is identified. On the other can, a forex trader can possibly wait for a pullback in a trend for a low-risk advantage. In this case, an overbought/oversold indicator will be needed.
A major example of an overbought/oversold forex trading indicator is the three-day relative strength index. This forex trading indicator is used by forex traders to calculate the collective sum of up days and down days over a certain period of time. These values are been calculated from 0 to 100.
PROFIT TAKING FOREX TRADING INDICATOR
A profit taking forex trading indicator helps a forex trader in making decisions on when to take a profit on a winning forex trade. A very good example of this forex trading indicator is the three day RSI. Here, a forex trader can hold a long position and make a reasonable amount of profit if the three day RSI increases to a level of 80 and above. Equally, a forex trader who holds a short position might have in mind to make a profit if the three day RSI decreases to a level of 20 and bellow.
In conclusion, forex traders should engage into having a vast knowledge of forex trading indicators in other to predict suitable strategies to making increased profits and avoiding losses.