The main goal of Forex indicator is to alert Forex traders of changes in the market. The Forex markets tend to behave differently under specific circumstances. Such behavior repeats itself, which means that certain price trends will take place time again. The best Forex indicator try to identify such patterns and their users benefit by exploiting that information. However, indicators have no way of knowing for sure what is going to happen next, so their usefulness is limited at best.
A simple example would be using the moving averages or stochastic variables of a Forex indicator to identify overbought or oversold conditions. The moving averages are used to identify a market condition, which is said to be overbought or oversold. By plotting where the average value intersects the line, you can identify the overbought condition.
Moving averages are essentially numbers which indicate fluctuations in the market. If we plot them over time, we can visualise the changing average value of price. An oscillator functions in a similar way to the moving averages. There are different types of oscillators, known as RSI oscillators, MACD oscillators and other such indicators. There are also market indicators which identify trends in the Forex market. These include the moving average convergence divergence index or MACD, the Stochastic oscillator and the exponential moving average convergence or EMA.
Another useful type of Forex indicator is the Periodic High Frequency Trader or APR. It identifies markets with periods of strong price movement over a period of time, usually over a number of days. Since trading in this case is about short-term price movements, the APR looks for the period when price activity reverses.
The third type of indicator is the Simple Moving Average or SMA. It indicates a trendline, which rises and falls in tandem with the overall average price movement over a period of time. As price moves between two higher and lower trendlines, the slope of the line representing the rising trend becomes smaller. APR's range over zero and over a maximum value of 1. As such, they act as directional signs.
Finally, another useful type of Forex trading indicator is the Simple Moving Average Convergence Divergence or MACD. This indicator shows the direction of price change over a time period. Trading signals based on MACD use the slope of the moving average line to identify market turning points. They are different from oscillators, since they measure the price change over a longer period of time. However, they have their uses, particularly when trading in sensitive markets like the indices for commodity and currency trading.
One can also use Forex trading indicators to spot support and resistance levels in a particular chart. When the chart has an upward sloping trendline, this indicates that there is sufficient support, which will prevent a rapid drop in prices. Conversely, a downward sloping trendline indicates that there is insufficient resistance, which will trigger a rapid rise in prices. Using the appropriate type of indicator in a reliable chart is important for sound Forex trading.
There are many more types of Forex trading indicators, each with its own benefits and limitations. The best way to learn about them and which one to use for a particular situation is to get advice from experienced traders. Alternatively, one can visit specialist Forex broker websites and request information about indicators in particular. Some websites also offer demo accounts, so that first-time traders can get a feel for using indicator techniques on real charts. Some broker sites also offer custom indicators for traders.
Stochastic and Relative strength index (RSI) are two popularly used indicators. The Stochastic indicator is based on the number of times the price moves in a given time period. The relative strength index (RSI) uses a mathematical formula to estimate the time periods in which the price moves. Traders often use these indicators as part of their standard trading strategy. However, other types of Forex trading strategy can be more efficient.
Two popular but less reliable Forex trading strategies include the moving average convergence or MACD and the moving average channel. The MACD indicator is based on moving averages, which can be visualized by a moving average line through the closing price. Traders often use this indicator to identify market reversal patterns. The moving average channel is different in that it is not visualized; therefore traders often use this indicator to identify support or resistance levels in a chart. However, because it is a time based Forex indicator, this indicator is not as accurate as other more precise indicators.
Bollinger bands, sometimes referred to as Band Spreads, are another widely used indicator in the Forex market. Bollinger bands are effective for identifying market states that are either above or below the moving average line. In addition to being used to identify market states, traders also use this indicator to determine if a price is overbought or oversold. The reason traders often use Bollinger bands is because these bands indicate when the price is expected to reverse directions. Traders may find this useful when considering future trades.