Many traders who are new to forex trading do not understand the meaning of different types of forex trading indicators and therefore they do not know how to make good use of these tools. Indicators are tools that help in the analysis and evaluation of forex trends. There are three types of forex trading indicators – the moving average crossovers, moving average trend lines and ranking charts. The choice of an indicator depends upon the trader’s trading style and his or her analysis of the forex market. Each of these three types has its advantages and disadvantages.
Moving averages is one of the most widely used indicators. Traders use this type of indicator to identify the forex trends. A simple moving average has the following characteristics:
It begins at the lowest prices, it rises and finishes higher, and it slopes upward. It can be calculated very easilydividing the closing pricethe beginning price and vice versa.
These indicators are widely usedtechnical analysts and experienced traders alike because they are easy to understand and calculate. However, there are downsides to the moving average – they tend to act as blinders for the trader. It is difficult to determine where the bottom is because the value of the line tends to deviate from the average over some time. Also, they are not particularly reliable since the range can be extremely wide. Another drawback of the moving average is that it is affected heavilynews events.
Moving averages can be used together with other types of forex trading indicators such as the volume overlays and the strength overlays. This is because they can help to identify strong selling or buying signals within the market. While these types of indicators are not exclusively usedtechnical traders, they are often combined with them to ensure that the decisions made are more reliable. However, since they are based on simple arithmetic formulas, using them in isolation can sometimes lead to poor decisions.
Another type of forex trading indicators is the oscillators. They work on the principle that trends will repeat themselves. The higher the resistance, the more likely it is that the trend will continue upwards. The support level would act as a safety stop, allowing the price to reverse before it gets too high. In this way, it is possible to determine when a reversal may be imminent and to take action to prevent it before it happens. Other than the moving averages, other indicators are also widely used. One of the most popular is the simple oscillator. It compares the price of the present time against that of the previous day. This indicator looks closely at the price action for a few days and tries to identify a general trend. This can be usedinvestors who want to invest more time watching for signals. Indicators can be used to identify support as well as resistance levels. When the prices show signs of being too volatile, traders tend to look for signals that indicate an uptrend. Traders use the upward sloping lines to indicate the support level. If they fall below it, they sell while the price is above it. They do the opposite when they rise above it.
Different types of forex trading indicators have varying levels of importance. Traders need to
choose which one best fits their needs. Most experts recommend, however, that a trader rely solely on one indicator. If an indicator is being used successfully, it means that there is something to be gained from it. A trader cannot make his moves simply because he has noticed a trend or a pattern. He has to weigh all his options and decide whether or not the indicator is reliable.