The FX industry has over 10 million active retail traders and a massive $2.4 quadrillion market cap meaning that it is the biggest financial market in the world spanning several continents and many national economies.
Many retail traders do not have any prior experience with trading or investments and often rely on simple yet effective technical analysis techniques that allow newcomers to quickly start making profitable trades without in-depth studying of various industries. While fundamental analysis remains the main source of information for long-term decision-making, some technical analysis tricks are often enough for day traders to earn here and there with impressive consistency.
What are technical indicators?
Analytical tools used to conduct a thorough analysis of price dynamics using only the information available to a trader in the price chart are called technical indicators. Many of them are results of research that took over a century to perfect. There are many interesting instruments that you can use when trading with a modern terminal.
There are three main types of technical indicators:
- Trend indicators allow you to quickly identify the current mood in the market by gauging average prices over certain periods. The perfect example of a trend indicator is the moving average.
- Momentum indicators describe the power of the current trend using different metrics as basics for their formulas. These are great when you want to find a good moment to catch the market when it changes its course. RSI and Stochastic are good examples.
- Volume indicators are tools that measure the volume of online trading including the number of orders open at any given moment. It is a good way to confirm your signals received from momentum indicators.
Which indicators are the best?
You should always use indicators that you understand and can easily implement in your trading strategy. It also depends on your style. For example, if you are a swing trader, you will mostly use momentum indicators. People who are more reserved and look for opportunities to open a long-term market position are often more interested in trend indicators.
Here are some of the tools that you will surely find useful:
- The relative Strength Index is a commonly used tool. Up to 90% of all FX traders use it to some degree. It is an extremely simple indicator that has only two moving parts in its interface: the RSI line and the Moving Average overlaid over the interface. RSI shows you the strength of the current trend. It has values from 0 to 100. When it approaches 70, you should sell. When it goes below 30, you should buy it.
- MACD or Moving Average Convergence/Divergence is a great tool that allows you to quickly identify moments when the market will change its direction. It is often used by institutional investors to find a good entry point for a long-term market position. MACD works of all timeframes, but has correct readings more often on H1 and higher.
- Stochastic is a great indicator that compares closing prices to highs of the selected period. The default range is 14, but you can change it to reflect an even stronger trend. In essence, it is an indicator that shows when the market is overbought or oversold allowing you to decide whether you can capitalize on a reversal. Experts believe that it works best on longer timeframes.
- Volume is an indicator that many traders keep open just to see how many orders are open at any given moment. It is a good idea to track volumes at all times to not follow signals of other indicators that can be based on incorrect market data. For example, RSI can be quite high while volumes are low indicating that a trend reversal is unlikely.
You can create an efficient strategy to consistently make profits, but remember that 2022 is the year of global recession, so trade carefully and make sure to not overextend your long-term market positions beyond necessary. Check fresh crypto news.