Like I have said before, a good forex trading strategy needs a lot of technical analysis. To perform technical analysis well, you can get help from different technical indicators. These indicators are built to help traders in this task and widely used around the world. Today, we will show you the 6 most used technical indicators in the forex market.
The relative strength index indicator (RSI) is used to signal when an instrument is overbought or it is oversold. This indicator is drawn from about 0 to 100, where 100 is the highest overbought condition and 0 is the highest oversold condition. The RSI helps measure the strength of recent upward movements of instruments compared to recent declines. This indicates whether an instrument has buying or selling pressure during the trading period.
Moving average convergence/divergence (MACD) is one of the most famous forex indicators used in technical analysis. It is used to signal both the trend and the volatility behind an instrument. The indicator consists of two exponential moving averages (EMAs) in two different time periods, which helps measure the momentum of an instrument.
This indicator helps measure short-term uptrend compared to long-term momentum to determine the future direction of assets. The MACD figure simply demonstrates the difference between the two moving averages, in fact the 12 EMA and the 26 EMA.
The ADX indicator is specialized in trend analysis. Thanks to this indicator, traders can determine how strong a trend is and which direction it’s heading. The main focus of this indicator is not the direction of the trend but the momentum of development. When the ADX number is higher than 40, you can believe that this trend is moving strong in the current direction (both up and down). When the ADX indicator shows numbers below 20, the current trend is believed to be relatively weak.
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The On-Balance Volume (OBV) indicator is used to measure positive/negative trading volume flows of an instrument, in relation to its price over time. This is a simple method to calculate the total volume by adding or subtracting the trading volume of each period, depending on the fluctuation of prices. This method expands on basic volume by combining volume and price volatility. This is very suitable for forex scalping strategies.
The meaning of this indicator is that trading volume precedes price volatility, so if an instrument has an OBV increase, it is a signal that the volume of transactions is increasing when the price is high. OBV declines means that the instrument is having increasing volume on days of falling prices.
In fact, the A/D line indicator is very famous and widely used for identifying the cash flow of a trading instrument. You may think that it is just like the OBV indicator. However, besides considering the closing price of an instrument in a specific time frame, the A/D indicator also calculates that period’s trading range.
This gives a more accurate picture of the cash flow compared to the balanced volume. The rising trend line is a signal of increasing buying pressure, as the instrument closed above the range’s middle point. The downtrend line is a signal to increase the selling pressure on instruments. This is suitable for position trading.
Traders use this technical indicator to identify if their instrument is currently in a trend or not. Moreover, if the instrument is indeed in a trend, Aroon indicator can help you know how long the trend is predicted to last. If not, this indicator can tell you when a new trend is predicted to form.
This indicator includes two lines: the Aroon-up and the Aroon-down. An instrument is considered to be on an uptrend when the Aroon line is above 70 and above the Aroon-up line. The instrument is in a downtrend when the Aroon line is above 70 and above the Aroon-down line.
Technical indicators are great for time-saving analysis. Thousands of traders have tested and put their trust in the 6 indicators in this article. Why shouldn’t you?