Those new to Forex trading who start by randomly searching industry websites for Forex trading tips will no doubt know the importance of technical trading indicators. New traders who do their research will soon get the idea that technical analysis is at the heart of successful Forex trading strategies, especially when it comes to CFD trading.
What are the trading indicators, and why do you need to know which ones are the best for your trading journey? In this article, we will look at the essential details of best trading indicators.
Just like the name suggests, trading indicators are mathematical calculations, which are plotted as lines on a price chart that indicate, and help traders identify specific signals and trends within the market.
As a new trader, it may be overwhelming to analyse data on the price chart, thus why trading indicators are of great use to simplify and provide signals to help you in making the right decisions.
We have chosen and taken into account the five best trading indicators that are suitable for the usage of new traders. Remember that these indicators, although will help you in your trading journey, also need to be used with other trading strategies you have learned.
Numerous trading indicators use moving averages. Technical indicators based on moving averages help identify the overall momentum of a trend, regardless of random short-term price fluctuations.
The indicator will plot a line on a chart that shows the average price over a period of time. This can help traders isolate the trend and can signal when the trend is likely to reverse.
They are known as moving averages because they chart price action over time, and as the price moves, new data factors into the calculation, causing the average to move.
Moving averages, then, show the average price of an asset over a set period, but unsurprisingly, there are different ways to do this and various types of moving averages. You can calculate a simple moving average by adding recent closing prices and dividing them by the number of periods in the calculation, creating a trend line over a series of data points.
An exponential moving average focuses on the most recent prices, giving those prices a higher “weighting” or more significance than other prices further along with the set of data points. Thus, exponential moving averages are also exponentially weighted moving averages.
Several specific indicators use moving averages in different ways, including the well-known Moving Average Convergence Divergence (MACD) and Bollinger Bands, a tool that uses an exponential moving average to track longer-term trends.
Different charting tools track slightly different data. Learning to use a few various trading indicators that utilise moving averages in different ways will enable traders to make more accurate price action predictions and more successful trades.
The Relative Strength Index (RSI) is another valuable indicator in CFD trading, allowing traders to assess the strength or weakness of a particular trading instrument. The RSI is a momentum oscillator that calculates relative strength based on the closing prices of an instrument over a set period.
The RSI works by comparing recent gains and losses in a market, from which it is possible to measure the speed and change of price movements. It is used by CFD traders to monitor price action, identify momentum and gauge when an asset is overbought or oversold.
Forex traders can incorporate the highly popular RSI into different trading strategies and use it alongside other well-liked technical indicators to develop a successful long- or short-term approach to CFD trading.
Swing traders also like the RSI and often use it alongside other tools, such as the Moving Average Convergence Divergence or a Point and Figure chart.
The RSI is also popular with momentum traders who tend to draw data from several different sources and may combine the RSI with Rate of Change tools and an Average Directional Index.
Volume indicators such as the on-balance volume (OBV) take the total volume traded over a certain time and assign it a positive or negative value.
When the price of an instrument is high, it receives a positive value, and when it is down, it gets a negative value. This effectively combines volume with price data to determine how strong (or weak) a price trend is.
There are several popular volume indicators, including the OBV, Money Flow and Chaikin Money Flow. There is no great advantage to using multiple volume indicators, but again, you should remember that technical indicators all work using slightly different values and data.
For this reason, if your broker’s trading platform gives you access to several different volume indicators, then comparing one with another can give a more accurate picture than using one in isolation.
Bollinger Bands are a type of statistical chart characterising the prices and volatility over time of a financial instrument or commodity, using a formulaic method propounded by John Bollinger in the 1980s.
Bollinger bands are useful for recognising when an asset is trading outside of its normal levels, and are used mostly as a method to predict long-term price movements.
When a price continually moves outside the upper parameters of the band, it could be overbought, and when it moves below the lower band, it could be oversold.
The width of the band increases and decreases to reflect recent volatility. The closer the bands are to each other – or the ‘narrower’ they are – the lower the perceived volatility of the financial instrument. The wider the bands, the higher the perceived volatility.
A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a specific time. The sensitivity of the oscillator to market movements is reducible by adjusting that period or by taking a moving average of the result.
The stochastic oscillator is range-bound, meaning it is always between 0 and 100. This makes it a useful indicator of overbought and oversold conditions. Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold.
Stochastic oscillator charting generally consists of two lines: one reflecting the actual value of the oscillator for each session, and one reflecting its three-day simple moving average.
Because the price is thought to follow momentum, the intersection of these two lines is considered to be a signal that a reversal may be in the works, as it indicates a massive shift in momentum from day to day.
Using the right trading indicators can be a great trading strategy. While paired with the right trading management tool can also give you deeper insights into price trends. Besides, technical trading indicators add significant value to the trading process.
Technical trading indicators, when being used the right way, may make up great trading entries for you. In addition to using trading indicators to define when to enter a trade, you could bring them up to the strategy level, to assess how the strategy itself is performing.
Now that you know the five best trading indicators for you to leverage as your trading strategies, let's look at the things you need to know before using these technical indicators.
The first thing that you need to know, as a new trader is you should never use the indicators alone, or too many all at once. Besides, it would be best if you also used technical indicators alongside your assessment of the movements of an asset's price over time.
Additionally, whenever you receive a signal from the indicators, best to confirm whether it is the right thing to do before making your decision. Remember, as the name suggests, only use them as an indicator alongside the other trading strategies you have already mustered.
There is a good reason why CFD and Forex trading tips often revolve around the importance of technical analysis. Learning Forex and CFDs are all about learning to monitor and predict price action, with little concern for the long-term value of the underlying asset or any other market condition.
So, finding good technical indicators that focus on price movement and are easy to learn is often a top priority for new traders.
Learning to effectively incorporate the use of technical indicators into your trading strategies will have a positive impact on your trading experience, but where do you start?
There are a lot of options. Some brokers have 100 or more technical indicators built into their trading platforms that unsurprisingly do more or less the same thing.
While it is vital to learn to use more than one technical indicator, constantly comparing one with another to avoid falling for false signals or using 100 at once is not exactly practical. There are a few essential technical indicators that new CFD traders will want to consider.
Ultimately, learning to use anyone's technical indicator is relatively straightforward. Learning to use several different indicators and combine the data that they provide into a sophisticated, in-depth, technical analysis of the market is much more challenging.
Sometimes, technical indicators seem to contradict each other, which can easily be a false signal but can also be the sign of an upcoming reversal, with some indicators lagging behind others.
Experienced traders eventually learn to combine many different trading indicators, charts and signals to predict price action, and they will still get caught out from time to time.
Suppose you are less experienced but ready to learn more about technical indicators and how to combine them to develop top-level technical analysis skills and concrete trading strategies. In that case, you might want to dig into our extensive archive of articles about technical analysis.
Trading indicators are mathematical calculations, which are plotted as lines on a price chart that indicate, and help traders identify specific signals and trends within the market.
Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis.