Also referred to as Forex technical analysis indicators, Forex indicators are mathematical operations and algorithms that incorporate the volume as well as the price of a particular security in order to reveal the price change of that security in the financial market.
The use of these indicators basically assists the investors or traders in making key decisions concerning the entry and exit into or from the financial market respectively. In essence, the indicators are applied in:
- Getting the direction of a particular trend and the period in which drift in the trend ought to take place.
- Assist in identifying any market participant sentiments; this, therefore, makes it possible for the trader to make possible price trends.
Application of Forex Indicators in various market environments
Various important factors are considered when establishing the value of a particular currency to another currency value. Numerous traders find it cordial to look at forex market charts using forex indicators to identify prospective opportunities in the forex trade; this strategy is deemed an easy way to getting the end result.
Two common market environments are observed when analyzing market charts. These markets are:
1. Support and Resistance Trading in ranging markets
This kind of strategy is usually developed in scenarios where the price regularly approaches a particular point and bounces back afterward. This strategy is, therefore, a technical analysis technique that analyzes a market chart as quickly as possible therefore discover three main points of interest for the trader.
These three points of interest are:
- The direction the market is trending in.
- The timing of a particular entry in the financial market.
- The exit point in the financial market for either scenario; a profit or loss.
These three aspects will help the investor in gaining a good trading ideology.
Support is the price level at which the demand or buying power is strong enough to prevent the price of security from further declining below that level of reference. It is represented in a market chart as an area in which the price has dropped but struggled to break below that area. The best tool to define support and resistance is Forex Monarch MT4 indicator. With this powerful tool you can also get good positions which bring you a small risk with big potential of profit.
Logically, as the price gets closer to support, thus becoming cheaper in the process, the buyers see a better deal and tend to buy the commodity. However, this is not the case on the sellers’ side as they are less likely motivated to sell; since they are getting a bad deal in the trade. In this scenario, the demand or the buyers, overcome the supply, also known as the sellers; thus preventing the price from dropping below support.
Resistance is the price level at which the supply or selling power is strong enough to prevent the price from further rising. The resistance level is represented by an area on the market chart in which the price has risen to that area but struggled to break above.
The rational explanation behind this analysis is that as the price gets closer to resistance, essentially becoming more expensive, sellers realize a better deal and tend to sell their commodity on a massive scale. On the buyer’s side, the process is different as they tend to not purchase that particular product.
In this case, the supply will overcome the demand, therefore, preventing the price from exceeding above resistance.
There are four key support and resistance trading strategies namely:
This strategy is applied at the space between the support and resistance as the aim of traders is to buy at the support level and sell at the resistance point. Therefore the traders will look for long entries when the price is at the support area and short entries when the price is at the resistance area.
It is also referred to as the pullback strategy. It occurs after a period of uncertainty of the price breaking out and starting to trend. Traders usually search for these breakouts below support or above resistance thus capitalize on increasing the momentum starting a new trend.
This strategy utilizes the trend line as either support or resistance. A line is drawn connecting more than one high or low in a downtrend or uptrend respectively. For a strong trend, the price will bounce off the line and move in the trend direction. Therefore the traders only search for entries that are in the direction of the trend to incur higher probability trades.
It is a dynamic strategy incorporating both the support and resistance approaches.
2. Trend Trading
This strategy has two main aspects that are to be taken into consideration:
- Traders usually aim to match their desired strategy with suitable market conditions; in this case, the focus is on situations that detail a market giving the trader the best result of success. If you can’t do manually, then Wallstreet Forex Robot 2.0 Evolution EA can be a good help as every trades will be analyzed and executed automatically.
- Trends in the market can be attractive due to a bias observed in that particular market sector; the bias comes about from the analysis of the chart trajectory.
Applying Forex Indicators in Day Trading
There are four key indicators that are used and relied upon by numerous forex traders and investors. These indicators help determine the most suitable period to buy or sell in the forex market. These indicators are:
I. A Trend-Following Tool
This is an indicator that assists a trader in realizing the direction of the major trend and thus make a profit from trading in this particular discovered trend. Its only task is to suggest whether to make a long or short position on a commodity. The moving average crossover is a perfect example of this kind of indicator.
II. Trend-Confirmation Tool
It is an indicator used in conjunction with the trend-following tool to confirm whether the suggestions given are appropriate.
If the two indicators agree and the trend-confirmation is a bull trend, then the investor can confidently take a long trade in a commodity; in the case of a bear trend, then the trader is better off finding means to sell short the commodity. The moving average convergence divergence indicator is a perfect example.
III. Overbought and Oversold Tool
This tool is an indicator used to assist the trader in deciding whether to instantly enter a trade on the major trend or wait for the pullback to occur.
IV. The Profit-Taking Tool
This indicator assists the trader in gauging the appropriate time to take profit on a successful trade. This indicator can be used by traders transacting in both long positions and short positions.
Learning and being able to use the various forex indicators can assist in getting suitable strategies for getting successful trades on the forex market. Monitoring and analysis of these indicators can give strong signals which will assist the trader in making a decision that will incur more profits.
It is also important to use simple and clear strategies with the indicators thus allow for quick reactions to the market based on the gotten data and reduced complications in the whole process.