TRADING

Best 5 indicators for forex traders – ForexLive


The best indicators to help with your trading


Trading
forex requires a depth of insight into the trend of the market. The trader needs to
understand the direction of the market and be adequately guided. The essence of
this is to know exactly when to trade or take the right position.

Traders
are not left to hazard guesses; indicators have been designed to guide them. In
this article, the best 5 indicators are carefully x-rayed.

So,
what are the best indicators traders can use? Below is a list of the top
reliable indicators we have chosen after a careful market survey.

List
of best 5 indicators

Though
it is difficult to say a particular indicator is better than others, we have
selected these after we have tested them and also based on the fact that a lot
of traders trust them.

1. The Relative Strength Index (RSI)

The
Relative Strength Index was designed by J. Welles Wilder to estimate the speed
and change of price movements. RSI, which functions as a momentum oscillator,
is popular among traders because of the relative simplicity of interpreting it.

RSI
is plotted on a distinct scale; it comprises of a single line calibrated from
0-100 that contrasts the strength of the stock’s recent gains and recent
losses. The RSI is useful in identifying overbought and oversold conditions. It
also authenticates other technical indicators and alerts traders of possible
reversals through divergence with price trends.

Calculating
RSI involves multiple steps of computing relative strength by drawing a
contrast between gains and losses. This is attained by observing the following:

  • Calculate
    Average Gain:  total gain/period
  • Calculate Average
    Loss: total loss/period
  • Calculate
    Relative Strength (RS): to obtain relative strength; the average gain is
    divided by the average loss; Average gain/average loss.

Therefore
RSI = [ 100 -(100/(1+RS)]

2. Moving Average Convergence Divergence (MACD)

Moving
Average Convergence Divergence is a momentum indicator that follows the trend
and indicates the correlation connecting two moving averages of a security’s
price. MACD looks quite difficult to adopt by inexperienced traders who do not
yet understand the awesome functionalities it offers.

The
more experienced traders use MACD more dynamically; in most cases, in
combination with other appropriate tools. Although MACD is a lagging indicator,
it could be converted into a momentum oscillator. To do this, you subtract the
longer moving average from the shorter moving average.

MACD
is an example of a trend indicator; it is made up of three components, namely;
a fast line, a slow line, and a histogram. Its primary advantage is its
ability to determine a trend reversal. It can also be used to identify the top
and bottom lines of trends which helps the trader to reduce the risk on his
investment.

3. Bollinger Bands

The
Bollinger bands are a volatility indicator invented by financial analyst John
Bollinger. It is one of the best indicators for Forex trading out of the
several volatility channel methods available for Forex traders.

Bollinger Bands are among the most
popularly used technical indicators. They are easy to apply and are useful as
accurate trends, volatility, and momentum indicator. They can also help to
identify new trends and the end of trends, making them truly multiple purpose
indicators.

The
Bollinger band uses two parameters:

1.
The duration for the moving average is usually 20 days.

2.
The number of 2 standard deviations that you want the band placed away from the
moving average in stock trading.

Used
in combination with an oscillator to generate buy or sell signals

 •
If Bollinger Bands are used in conjunction with an oscillator such as Relative
Strength Index (RSI), it generates buy and sell signals when the Bollinger
Bands signify an overbought/oversold market at the same time the oscillator
signifies a divergence.

When
charted automatically by a trading platform, Bollinger bands are very easy to
use and can add another scope to plot analysis for a trader.

4. Stochastic Oscillator

George
Lane, a market technician, developed the Stochastic oscillator to identify when
security is overbought or oversold. To achieve this, it equates a security’s
recurrent closing price to its price range for a defined period.

The
principle employed by the Stochastic Oscillator is the probabilities required
with random distribution. The Stochastic Oscillator is symbolized by %K; it is
used to compare the evolving price action to a relative average value. The
derivation formula is given below:

%K
= ((Closing Price – Range Low) / (Range High – Range Low)) * 100.

The
Stochastic Oscillator is an indicator that does not go after price or volume
but indicates the speed, or momentum of a price. As a result, it helps to
predict a change in the direction of the price.

The
Stochastic oscillator is a popular indicator among traders for identifying a
bullish or bearish trend in the market.

The
adaptability of Stochastics makes it a methodology adopted by many experts and
new traders alike.

5. Average Directional Index (ADX)

The
Average Directional Index is an outstanding indicator. ADX is used to measure
trend strength. ADX computations are based on a moving average of price range increase
over a specific period. Most indicators either work best for trending markets
or range-bound markets, but few can execute both tasks effectively.

However,
the ADX, which can be used as a single indicator to measure the strength of a
trend, is also a component of the Directional Movement System developed by J.
Welles Wilder. The average directional index (ADX) is used for deciding when
the price is trending strongly. When you trade in the direction of a strong
trend, you reduce the risk and increase the prospect of making a profit.

ADX
identifies trending conditions in addition to helping the trader find the
strongest trends to trade. Its ability to measure trend strength is a great advantage
for traders. ADX also recognizes range conditions; that way, a trader does not
get trapped trying to trend trade in sideways price action. ADX also notifies
the trader of changes in trend momentum, addressing the issue of risk
management in the process. 

This article was submitted
by LegacyFX.

For bank trade ideas, check out eFX Plus

Let’s block ads! (Why?)


Scalping Strategy Course (DVD + Online) - $299.00

In the much anticipated Forex Scalping Strategy Course, Vic and Sarid show you short-term focused techniques and strategies to make quicker profits while reducing market exposure.




Forexmentor Coach's Corner First Month (Online) - $149.00

The Coach's Corner offers 2 live sessions per week, an integrated approach to trading, FREE access to the VicTrade video course and Darko's Pattern Trading Video Lessons.



Source link

Have your say