Successful forex traders usually have a lot of experience. They have worked the markets for many years, so they have an instinct for currency movements. For less experienced traders, it is a lot trickier, which is why technical indicators can be useful.
What are Technical Indicators?
Technical indicators are helpful tools. They are computer scripts working inside a trading platform such as MT4. You don’t have to use them, but they often provide valuable information. Technical indicators use historical price data to predict future price movements. It’s more insightful than gazing into a crystal ball or rolling a dice.
Forex technical indicators perform complex mathematical calculations and present the information in chart form. You have a quick visual guide to market movements, which helps you to make the right trading decisions. You are not obliged to use the information presented to you, but inexperienced traders often find it helpful.
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How Useful are Trading Indicators?
While trading indicators are undeniably useful, it is important not to use too many of them or rely on them to the point where you ignore other data. Technical indicators can highlight patterns you might not have spotted. They can save considerable time on market analysis. They can also help you pick a currency pair from a large basket of options.
What technical indicators can’t tell you is what to do. That’s your decision. Technical indicators also lag behind currency prices. The algorithms calculate prices using quotes in the system, so by the time you spot a signal to sell, the price has already dropped.
However, trading indicators do have their uses, and if you are relatively new to forex trading, it is worth implementing one or two.
Tracking Moving Averages
Moving averages indicators track a currency’s average price over a selected time period. This removes the excess ‘noise’ from the trend line, so you can see the overall pattern in price movements. The moving averages indicator can’t predict what will happen next, but it does offer insights into which way the market is moving.
You can track short-term trends or follow long-term historical trends. The general rule is to sell when the trend is downward and buy when a currency is trending upwards.
Fibonacci was a famous mathematician who discovered the Fibonacci sequence of numbers. Traders use the Fibonacci sequence to track short-term price movements and corrections. Tracking price movements using a Fibonacci retracement tool, traders can identify support and resistance levels in their charts. They are used to judge when to buy or pullback.
Used in conjunction with other tools, the Fibonacci technical indicator is extremely useful.
Traders use Bollinger bands to monitor market volatility. Prices are boxed in between two bands. The prices will fluctuate but largely stay in the box. A narrow box indicates low volatility, and a wide box, high volatility.
Bollinger bands are a useful visual tool, particularly in a sideways market, but they are not recommended when prices are trending up or down.
Experienced traders use between two and four trading indicators, so follow their lead.