A Small guide about the best Indicators to use in Forex trading
In Forex Trading, there are 4 types of traders. There are those who focus:
- Solely on technical indicators
- Purely on the fundamentals
- Combine the synergies of the two strategies
- Who don’t use any strategy at all.
Over time, it has been proven that successful traders are those who combine the strengths of technical and fundamental indicators.
In a previous article, we discussed in details the tips that one should use when using the fundamental indicators. In this article, we will focus on technical indicators for forex trading and how traders can use them to achieve success.
→ Why trade Forex is better than other asset classes?
What are Technical Indicators?
Technical indicators refer to data points that have been derived from statistical formulas.
The aim of these indicators is to use historical data to predict what will happen in the future. These indicators have been used for many years in the financial world.
In computing the future performance of the pair, the indicators factor in various forms of data including the opening price, the closing price, and volumes.
The role of the trader is to study the indicators carefully and place or exit a trade. Also, it is important to note that using today’s technologies, the trader need not understand the formulas used.
Rather, the trader only needs to know how to interpret a particular trend.
Main Indicators for Forex Trading (and not just this)
There are hundreds of indicators in the market today.
These are provided by forex brokers for free. However, to be successful, the trader need not to understand all of them. In fact, traders who use many indicators end up making serious mistakes since some are more accurate than others.
To avoid making this mistake, it is recommended that traders learn only a few indicators, test them and use them to trade.
Some of the main types are: Momentum indicators (which measures the rate ofchange of an instrument), Oscillators (which indicates the fluctuations below and above the center line), volumes (which measure the amount of activity in the market), and trend lines (which show the trend in the market).
Tips For Using Technical Indicators
Having understood the various types of indicators, we will now highlight a few tips on how to use the technical indicators.
Always combine technical analysis with fundamental analysis
Successful traders always combine the two types of analysis (do you remember? It’s the 3rd type we mentioned at the beginning). This is because technical analysis tends to focus on the past events and fundamental analysis focuses on the present and future issues.
In addition, there are certain situations where technical analysis will not provide adequate solutions. For instance, technical indicators are not programmed to predict the outcome.
In such situations, it is important to rely on fundamental analysis and avoid the market because no one knows the exact number and how the market will react.
Understand the indicators
It is also important to understand the indicators to use. Different one have different ways of analysis.
It is important for you to take time to learn these indicators and how they should set up. There are many learning materials (videos and texts) which one can use to learn how the indicators work.
We recommend that you take at least 2 months to learn the indicators using a demo account before using real money.
Use Few Indicators
As stated before, many traders make the sad mistake of using very many indicators at a go. Always remember that two is a company, three is a crowd.
Traders who use more than two indicators at a go make mistakes because of poor visibility and poor market data interpretation.
Therefore, We recommend that you use at most 2 indicators per trade.
In day trading, patience is an important aspect without which no trader can make it. In fact, some indicators are usually require more time before their predictions can come true.
For instance MACD, which is one of the most accurate indicator is known for being very slow. Therefore, you need to be very patient as this will prevent you from making the wrong decisions.
Adjust the values of the indicator
All indicators come with their default values. For instance, MACD has the following defaults: Fast EMA (3), Slow EMA (5), MACD SMA (13).
You should always adjust these figures to suit your trading pattern!
To know the exact figures to have, we recommend that you use the information in the learning materials you use. You should also adjust the visualization status of the indicators and have colours that you are comfortable with.
We believe that by using these tips, you will be at a good position to make wise trades.
The most important thing to remember is that in trading, no one is immune to losses. Every trader, including those in big investment banks, lose money (and some of the best Forex Trader). Therefore, one should take losses as lessons.
External useful resources
4 Effective Trading Indicators Every Trader Should Know – DailyFx