The Top 6 Forex Indicators Every Trader Should Know
The popularity of forex trading has risen exponentially in recent years. As the world’s most liquid and valuable financial market, it makes sense that forex trading continues to boom. According to BIS, forex markets had a daily turnover of $6.6 trillion in 2019. Moreover, the total value of forex markets globally was approximately $2.409 quadrillion.
Conversely, the world’s largest stock exchange, the NYSE, is worth $26.6 trillion. These numbers highlight how valuable the forex market is compared to other financial markets, dwarfing most of them substantially.
USD-Euro Currency Pair
For decades, forex trading wasn’t available to the general public. Financial institutions, banks, and governments were the only ones trading foreign currencies. However, the advent of the internet changed that. Today, millions of people globally trade forex. The foreign exchange market comprises over 170 pairs of currencies.
Naturally, people gravitate towards forex trading as they see others making significant returns. However, the reality is that making money in the forex market is easier said than done. Most people who become forex traders fail to realize profits. That’s because the forex market is vast and complex. It requires comprehensive understanding cultivated from years of experience.
A forex trader checking market movements on their smartphone
What are Forex Indicators?
Traders don’t make trades blindly. They research and examine various datasets. In addition, they try to gauge how the market will react to the data. Then, they trade. Trading requires extensive due diligence and research. Traders use forex indicators because they’re one method for examining data. Traders assess numerous factors like currency price, volume, volatility etc.
The Top Forex Indicators to Use
Here are some of the top forex indicators that can supplement your forex trading. They include:
Moving Averages
Moving averages operate on the concept that macroeconomic factors significantly impact foreign exchange markets. Central banks and multinational companies also affect the forex market, influencing it at every turn.
The moving average is primarily a trend indicator. However, you can also use it for identifying support and resistance levels. It’s a plotted line measuring the price of a currency pair over a predetermined period. For instance, you can use the moving average to see how a currency pair’s price has fluctuated over the last 50, 100, 200, or 365 days. There are two moving averages every trader should know. These include the simple moving average and the exponential moving average. The simple moving average highlights a currency pair’s average price over a specified period. On the flip side, the exponential moving average gives more weighting to recent prices.
Typically, if a currency pair’s price is above the moving average, it’s a sign that buyers are driving the price. However, if a currency pair’s price remains below the moving average, it means sellers are mostly influencing the price.
Relative Strength Index
The relative strength index is another excellent forex indicator that many traders use. It ranges from 0 to 100. The relative strength index is beneficial because it indicates where the price will likely reverse.
For instance, when a currency pair is trending upwards, its price will increase. If the price crosses 70 on the relative strength index, the likelihood of a bearish market reversal is high. Likewise, if a currency pair is trending downwards, the opposite is true. However, once the currency pair moves below 30, the chances of a bullish market reversal peak.
MACD
The Moverage Average Convergence and Divergence (MACD) is one of the most common forex trading indicators. It combines a histogram and an exponential moving average. Traders primarily use the MACD to determine divergence with the price. The MACD shows two kinds of divergence –regular divergence and hidden divergence. The regular divergence represents a market reversal. On the other hand, the hidden divergence shows that the market will continue to trend in the current direction.
The MACD is a helpful indicator because it allows traders to set entry and exit points.
Bollinger Bands
Bollinger bands are named after their creator, John Bollinger. The Bollinger bands feature moving averages as their centerpiece. However, two bands – an upper band and a lower band – envelope the moving average. These bands also serve as support and resistance levels. Rejection from these bands suggests a possible entry point for traders.
Stochastic
Stochastic was developed in the 1950s. Since then, it has remained a popular momentum indicator for forex traders to use. The Stochastic indicator identifies overbought and oversold currency pairs. Like the relative strength index, the stochastic indicator also moves from 0 to 100. If a currency pair’s price rises above 70 on the Stochastic scale, it indicates a reversal is likely. Likewise, if the currency pair’s price drops below 30, it hints at a bullish reversal.
Ichimoku Cloud
The Ichimoku Cloud is another forex indicator that has become popular recently. That’s because it includes several elements that encompass a complete trading strategy. Traders can use the Ichimoku Cloud to understand the market completely. For instance, the Kumo Cloud enables traders to learn about the market context. If a currency pair is trading above the Kumo Cloud, it represents bullish market sentiment. Likewise, if a currency pair trades below the Kumo Cloud, it represents bearish market sentiment.
The Ichimoku Cloud also features other elements like Tenkan Sen and Kijun Sen. These lines resemble a moving average. If either of these lines indicate rejections, traders have an entry point.
Various currency notes
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