As a forex trader, it is paramount to make use of technical analysis tools for your strategy. Referred to as forex indicators, these are tools that come readily installed on forex trading platforms to offer traders a better insight into the market trends.
With these tools, you can set your long-term and short-term trading goals based on the analysis they offer, get the actual state of a trading currency pair, and even gain access to previous trading data to check for a pattern.
Different traders use different indicators depending on their trading strategy. While some indicator tools work better than others do, there is no one-fit-all trading tool for all traders. The best choice depends on a trader’s personality, trading style, and mindset. Here are the most commonly used trading analysis tool by forex traders.
MA (Moving Averages)
These are some of the most preferred technical indicators in forex trading. Moving averages identify price action breaks and the general direction the price take. They are represented by lines on a forex chart that assess currency pair averages in a set period. This can be anything from a few days to hundreds of days.
The moving average lines help in knowing the general trend on a pair. When using moving averages to trade forex, it is important to remember that the shorter the period a moving average is set, the faster they react to changes in market prices.
Moving averages are more stable compared to other indicators, and they are ideal for traders who set long periods, including position traders. However, these averages rely on historical data, making them slow in a fast-changing market. When used on short-term trades, the trader may fail to get enough analysis from a simple moving average. The best moving average for short-term trades is the exponential moving average.
An oscillator in forex trading is used to show whenever a market pair reaches a limit and is likely to change a trend to the opposite direction. For instance, when a pair price is on an upward trend and reaches a very high price, it is referred to as an overbought pair. This indicates that the price is likely to remain stable or move downwards as traders try to maximize gains.
When the price is on a downward trend, traders are likely to enter the market, which raises the price. This is referred to as an oversold market. Generally, it is ideal to buy from an oversold market and sell in an overbought market.
Oscillators are excellent tools for predicting price movement breaking points. When seen on a chart, oscillators are seen as lines moving in the same direction as the market price. Sometimes, the lines move apart to show a loss in momentum on a pair trade. With the proper use of oscillators, traders can identify market trends as well as trade opportunities before price movements.
Oscillators are excellent sources of valuable technical data, including market momentum and speed, without relying on trading volumes or currency prices.
Fibonacci retracement lines
Fibonacci retracement tools are types of trading tools based on the Fibonacci sequence represented by lines that indicate support/resistance levels in trades. Fibonacci retracement lines follow and predict small market reactions or retracement on large moves. They are a series of continuous patterns that use 23.6%, 38.2%, 50%, 61.8%, and 100% ratios to determine target market prices or place stop-losses.
As an important part of evaluating forex trades, market prices are more likely to show extensions and retracements in line with the Fibonacci theory. There are numerous success stories from traders who use the Fibonacci theory in their strategies.
These are volatility indicators widely used because of their simplicity. Whenever a currency pair price goes above a moving average or to a certain amount, this indicates the beginning of a market trend shows by Bollinger bands. Bollinger bands have standard deviations of 2 to 2.5 from SMA (Simple Moving Averages).
Usually, Bollinger bands are represented by lines that expand or retract to represent volatility. When there is a wide distance between an upper or lower band, this indicates a new market volatility movement, while a smaller distance from the upper and lower bands predicts a possible price breakout.
While they are ideal trading analysis tools, they rely on past performance data, making them unsuitable for identifying trading points early. Bollinger bands are best used with other technical indicators to maximize their potential.
Technical analysis indicators can be beneficial to a forex trader. They simply price data, offer trend signals, and indicate the best trade entry/exit points. Once you learn to use the best indicators for different periods of trade, you will master the art of using data to influence your trade, which leads to better performance.