Technical indicators are an essential tool in forex trading, as they help traders understand the market forces and anticipate price movements in order to decide whether to buy or sell. These indicators play a vital role in forex technical analysis.
Technical Indicators Explained
Technical indicators are made of mathematical calculations which are created to identify market trends and trading signals. There are various types of forex technical indicators including the leading and lagging indicators. The leading indicator is a foreword signal that predicts the upcoming price movements, while a lagging technical indicator assess past trends and measure price momentum.
When it comes to technical indicators, there are a wide variety of technical analysis indicators that can help you identify good trading opportunities. They vary from simplicity as in trendlines to complicated mathematical calculations. However, advanced trading platforms do all the calculating work for you.
Why Do Traders Use Technical Indicators?
Technical indicators are essential for identifying the overall price trend, entry and exit points for every trade, and support and resistance levels. Technical analysis helps you determine not only when to enter a market, but more importantly when to get out. This is what makes it a helpful tool that should be considered in any trading strategy.
So, what is Forex Technical Analysis?
Technical analysis is based on the study of historical price action in order to identify price patterns and predict the future movements in the forex market through the use of technical indicators and historic price patterns.
Although forex technical analysis depends mainly on charts and patterns, it also includes aspects of behavioral economics and risk management. The main goal behind technical analysis is identifying trading opportunities and predicting price direction.
Technical analysis is widely seen by novice traders as an easier approach to analyze the market. Learning the basics of forex technical analysis and tools can be sufficient to start trading. Once you understand the main concepts of technical analysis, you can apply them to any market, which makes it a flexible analytical tool.
Top Technical Indicators Used in Forex Analysis
Moving Average (MA)
The moving average (MA) is a calculation to analyze data using the average change in a data series over time. It is a common technical analysis indicator that is used in identifying and spotting market trends. It is so popular because it is simple, versatile, and easy to apply.
Moving averages represent continuously calculated values that change constantly based on the average price changes in a set period of time. They mitigate price fluctuations by smoothing them out. So, they help in looking beyond transitory price effects and seeing the big picture and general trend instead.
MA are trend-following indicators that are commonly used to identify support and resistance levels as well as the overall trend. The shorter the time frame for the moving average, the more accurate it is, as in longer time frames the lags become greater. However, in shorter frames, the MA is more sensitive to price changes.
There are different types of moving averages out there, each is characterized by the way the data are weighted. The three basic and most common types of moving average (MA) are:
- Simple (SMA): It is the simplest formula of the moving averages, calculated by adding the set of values and dividing them by their count.
- Exponential (EMA): The calculation of this indicator gives more weight to recent prices.
- Weighted (WMA): It is a more complicated formula that assigns greater weigh to recent prices, calculated by multiplying the given price by its weighting and totaling the values.
Fibonacci retracement levels are used to measure how far prices will move against the current trend. They are drawn between the higher peak and lowest dip in a certain market movement to assess the continuity of a price pullback.
Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. 50% is also used as a retracement level although it is not an official level. These levels are used as support and resistance levels in addition to identifying upward and downward trends.
There another indicator known as Fibonacci extension, which is a continuation pattern.
The Bollinger bands indicator is used to measure the price volatility, and determine entry and exit points for trades. The indicator consists of three main parts; the upper, middle and lower bands. These bands are used as an indicator of oversold and overbought conditions through providing a trading range for the price. The narrower the bands are, the lower volatility the price is. The wider the bands become, the higher volatility the price is.
Relative Strength Indicator (RSI)
The RSI is one of the most common technical indicators. It is used to identify overbought and oversold conditions, price momentum and reversals. The relative strength indicator is shown as levels from 0 to 100. The RSI signals an overbought market by breaching 70, while lower than 30 indicates an oversold market.
Stochastic is another popular momentum indicator that is created to show overbought and oversold zones. It is commonly used to identify possible profit-taking levels due to its ability to pinpoint where the price is expected to reverse. Also, it can measure price momentum by comparing trading range and closing price over a certain period. The Stochastic ranges from 0 to 100 levels. Below 20 represents an oversold market, and above 80 reflects an overbought market.
Average True Range (ATR)
The Average True Range indicator is used to measure the price volatility. It calculates the true range of prices between highs and lows. The lower the ATR index, the lower the volatility. The higher the indicator, the higher the volatility is.
Moving Average Convergence and Divergence (MACD)
The MACD is a trend-following momentum indicator that assesses market forces and indicates changes in momentum, direction and strength of a price trend. MACD is calculated by subtracting the long-term exponential moving average (EMA) from the short-term EMA. The indicator is bullish when the MACD line is heading up, and bearish when it falls lower below the zero level.
This indicator shows the equilibrium level of supply and demand in order to determine potential turning points. It is often used by forex traders to identify levels of possible support and resistance. When the price of an asset reaches the pivot point level, it reflects balanced demand and supply. If the price moves above the pivot point level, it means higher demand. While higher supply is detected when prices move below the pivot point level.
How to learn Forex Technical Analysis?
There are plenty of online resources to learn the basics of forex technical analysis. However, attending online courses and getting in touch with professional traders can help speed up the process. This will help you avoid common mistakes usually made by beginners. Read the detailed guide on how to learn forex trading.
The best way to learn technical analysis is to understand the key principles and apply that knowledge to demo trading.
Another method to learn is imitating professional traders until you get sufficient to trade on your own. Copy trading is a strategy through which a trader can copy a professional trader’s positions, either automatically or manually. This trading technique aims to follow professional traders who have a track record you would like to emulate. It is a way to automate your trading strategy. Copy-trading allows traders to monitor and learn from the strategies of successful traders. This technique best suits traders who don’t have time to keep up with the market or still lack the experience to trade profitably on their own. Learn more on how to Copy Trade with AximTrade.
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