Thus far, 2020 has been an extremely volatile year for most traders. Because of the sudden burst of volatility—triggered by the COVID-19 outbreak, unstable energy prices, international tensions, and many other important factors—some traders who have traditionally operated in the stock trading space are now looking for new markets. One international market that has seen increased levels of daily trading volume, in particular, is the foreign exchange market.
The foreign exchange market, or “forex market” for short, is the international currency market upon which different currencies are traded. Forex traders, ideally, will be able to buy currencies that are about to increase in value while selling currencies before their value begins to drop. These exchanges are made using currency pairs. For example, a forex trader might carefully monitor how the relationship between the American Dollar (USD) and the British Pound (GBP) changes over the course of a day.
Due to the use of leverage, the forex market experiences extremely high levels of activity (often more than $6 trillion daily), and traders can also open relatively large positions. In fact, the forex market is actually much more accessible than many aspiring traders initially assume. In some cases, the market can be accessed with an opening position of $1,000 or even less.
Of course, as you will find in any market, every forex position you could possibly open carries with it a certain degree of risk. Forex day trading can be extremely profitable, but it can also be quite costly, meaning that you will need to sincerely know what you are doing. Fortunately, by conducting some technical analysis, traders can identify which currencies are most likely to enjoy a relative price swing. To be a successful technical analyst, you will need to choose a few reliable technical indicators. Below, we will discuss eight of the best indicators for forex traders and will discuss how these particular indicators can enhance your forex trading strategy.
1. Bollinger Bands
Originally introduced by John Bollinger in the 1980s, Bollinger Bands have proven themselves to be among the most useful channel indicators in modern use. The bands themselves are designed to contain about 95 percent (two standard deviations) of all price movements, allowing traders to determine whether a price breakout or reversal to the mean is most likely to occur. The bands are also useful for gauging just how volatile a given currency can be; wider bands indicate highly volatile markets, whereas narrow bands indicate that the currency pair is rather stable.
2. Simple Moving Average
The Simple Moving Average (SMA) is a “smoothing” forex trading indicator that makes it easier to determine whether prices are generally moving up or down. To calculate the simple moving average, all you need to is average the price over a specific number of periods (26 periods is commonly used). Simple Moving Averages are useful in every speculative market and are especially useful for currencies and assets that have cyclical variables.
3. Exponential Moving Average
The Exponential Moving Average (EMA), like the Simple Moving Average, is used by traders who want to see the average price within a given period of time. Unlike the Simple Moving Average, the Exponential Moving Average is weighted to emphasize prices from more recent periods. By using an EMA, traders can recognize possible trends more quickly. However, the EMA can also cause “noise” to seem louder than it really is, which may cause traders to assume a trend is forming too soon.
4. Relative Strength Index
When a currency is overbought, its value will likely soon go down and if a currency is overbought, its price will value soon go up. The Relative Strength Index (RSI), looks at the speed and direction of price movements, enabling traders to decide whether overbought or oversold indications are present. The Index itself occurs upon a scale of 0 to 100—when it drops below 30, the currency is usually considered oversold and when it rises above 70, the currency is usually considered overbought.
5. Ichimoku Cloud
Developed in Japan, the Ichimoku Cloud is a well-rounded forex indicator that empowers traders to quickly access a lot of valuable information. The indicator’s five lines—Chiku Span, Tenken Sen, Kijun Sen, Senkou B, and Senkou A—exhibit various trends and will all need to be considered in relation to one another. When one line crosses over another, this is an indicator that something has changed and it will be up to each trader to adjust their positions accordingly. While using the Ichimoku Cloud will take some practice, it is certainly one of the most useful technical trading indicators around.
6. Parabolic Stop and Reverse (SAR)
The Parabolic SAR is a useful indicator that helps traders recognize the general direction of the current trend and whether the current trend is likely to soon reverse. When the parabola dips below the price, this indicates that prices may rise and that a trader should open a new position. On the other hand, rising above the price line means that a value decrease is likely to occur.
7. Average True Range
Because the forex market has been so exceptionally volatile thus far in 2020, there has been a growing need for reliable volatility indicators. The Average True Range (ATR) is simply the difference between the periodic high and the periodic low. As the average true range increases, this means the currency itself is becoming more volatile. In some cases, this can it possible to identify trends as soon as they begin developing.
8. Pivot Points
Pivot Points are yet another technical indicator used to gauge current levels of resistance and support. The “pivot value” is calculated by taking the mean of the high, low, and closing points. In many ways, this means that pivot points are similar to candlestick trading charts. By paying attention to multiple technical indicators at once, forex traders can develop a better understanding of the current market.
There are many different forex trading indicators that you can choose to use. The ones that will make the most sense with your forex trading strategy will depend on your goals and your ability to tolerate risk. If you are new to the forex trading community, be sure to give each of these indicators a try.