For traders who are just starting out, getting the hang of using technical indicators can seem like an arduous task.
If you’re looking for a place to start, this is it.
Given below are the top 4 indicators that are most widely used in technical analysis. Before getting into the actual indicators, let’s first go over what an indicator is.
What is a technical indicator?
A technical indicator is a calculation based on historic data such as price, volume, and open interest information used to project future market direction.
A technical indicator is used to understand how a market might move in the future based on what happened in the past. This method assumes that there are patterns that repeat in the market. In this way traders are able to take informed decisions when trading.
So let’s look at some indicators now.
- Moving Average
Moving average used by plotting the average price for a duration over the actual price in that duration. Depending on whether the price is above or below the moving average, traders can tell if the market is bullish or bearish.
In addition to seeing the general trend, one can also see how strong the trend is by looking at the slope of the moving average.
Mainly there are two types of moving averages:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
SMA calculates an average of price data while EMA gives more weight to current data.
Bollinger bands are used to project trend reversals and turning points by identifying overbought and oversold conditions.
Bollinger bands comprise three lines; the middle one is the Simple Moving Average and then there is an upper and lower band.
You already know what SMA is. The upper and lower bands are 20 standard deviations (+/-) from a 20 day SMA but these can be modified.
Stochastics is a momentum indicator that makes use of support and resistance levels.
Market is always evolving through buy and sell cycles. It’s overbought or oversold conditions that often result in a shift or reversal in the trend.
Stochastics identifies these conditions by comparing closing price of a currency at a given time to a range of prices over a period of time.
If a trader wants to eliminate sensitivity of the stochastics indicator to the market movement, they can take moving average of the result.
Parabolic SAR is a trend indicator ideal for the identification of short term trends.
The SAR in Parabolic SAR stands for Stop and Reverse. It is used to identify reversals in market price to help traders take informed decisions for entry and exit.
What Parabolic SAR essentially does is highlight the direction in which a currency is moving. It appears as a series of dots above or below a currency’s price depending on the trend direction.
If the trend is upwards, the dot will be above the price. And if the trend is downwards the dot will appear below the price.
You can use it to determine what position you should take.
We hope this will help you take more informed decision when trading. You can start with these basic technical indicators as a beginner level Forex trader and as you get the hang of these you can move on to other more advanced ones.