Five effective forex indicators you should know

It can be tricky to trade the forex market at the best of times, yet with the following five forex indicators, it is possible to supplement price action to make better trading decisions.

Euro and pound
Source: Bloomberg

Forex trading can be a minefield for many, with technical analysis providing countless ways of analysing the same thing, leading to a so-called ‘analysis paralysis.’ Sometimes less is more, and instead of trying to use every indicator under the sun, it is important to focus on a handful to use alongside the traditional price action.

Learn to utilise each tool properly rather than spreading yourself too thin. The following list is not exhaustive, but gives a good idea of what tools can be used to build up a comprehensive toolkit to take on the forex market.

Simple moving average

Alternatives: exponential and smoothed moving averages (SMAs) 

Moving averages are often one of the first tools a trader will use when approaching technical analysis. However, these averages can be utilised in a number of ways and the popularity of them means they can be very useful.

Among other things, moving averages can be used as support/resistance, a tool to determine the strength of a trend, and the sign of a potential impending reversal. Bear in mind that when the price comes back to long-term averages such as the 200-day, it will become a big news story and as such people will pay attention.

Simple moving average

Stochastic oscillator

Alternatives: RSI, CCI, MACD

The stochastic oscillator is a popular example of an indicator that gives you an idea of the underlying momentum behind the price, hence the tag ‘momentum indicator.' The stochastic will oscillate within a boundary of 0-100, with a reading below 20 denoting an ‘oversold’ market, whereas a reading above 80 would denote an ‘overbought’ market.

However, this indicator is more complex than it may seem, with different ways to use the tool dependent on the form of the market. For instance, the overbought/oversold readings are more useful in a range-bound market than in a highly-trending one. Conversely, for a trending market you can utilise methodologies such as pattern recognition (double tops, head and shoulders etc.), trendlines, and divergences between price and momentum.

Stochastic

Bollinger bands

Alternatives: envelope, Donchian channel, Keltner channel

The Bollinger band is a very useful tool for recognising when the price is outside of its comfort zone, with the tool used for both breakouts and reversions to the mean. The indicator provides a band within which the price typically trades. The width of the band increases and decreases to reflect recent volatility.

When the price moves outside of the Bollinger band, it is a signal that it is extraordinary and thus it could mean we are about to break out, or else return back into a more ‘normal’ range of prices. This can be useful for a range, where a rally into horizontal resistance is accompanied by the Bollinger band, thus providing a good shorting opportunity.

Often when the price engages with the Bollinger band it will be fleeting, and subsequently moving away from it. The ability of the price to maintain and post a closed candle outside of the Bollinger band (above the upper or below the lower Bollinger) can signal a potential breakout in that direction.

Bollinger

Fibonacci retracements

Alternatives: pivot points

The Fibonacci tool can be applied in a number of ways. Firstly, the tool provides support and resistance, particularly within a trending market. Remember that a trending market will take a breather every once in a while.

This tool is useful for measuring those breathers and providing support or resistance within that trend. It is possible to utilise these levels as entry points when seeking to trade with the trend.

Average true range (ATR)

The ATR indicator is a measure of volatility, which when used properly can provide important information which can aid your position sizing and risk management. The ATR will rise and fall in tandem with volatility, providing traders with a tool that allows us to decide whether we should take higher or lower risk.

If the ATR is high, then we are likely to see wider swings, thus dictating a larger stop loss and smaller position size. Conversely, a market of lower volatility would necessitate a larger position size and closer stop to account for the lower volatility. Some traders will apply this indicator as a means to set their stop loss by using a multiple of the ATR to determine their stop.

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.

Finn artikler av analytikere

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.