If you are going to be using technical analysis then you should know about some of the foreign exchange indicators. There are many different indicators that you can use. However, there are 4 categories that most foreign exchange indicators will fall into. You should know what these categories are and how they affect your use of the indicators.
The Foreign Exchange Trend Indicator
The first indicator that you should be using will help you identify and follow forex rates trends. This is important because most forex traders use the trends to trade with or need to know when a trend is coming. Many traders use trend indicators to find their entry points for a trade, but you can also use them to get a general idea of the market. The most commonly used trend indicator is the moving average.
The moving average uses the closing points for trades over a number of days. This information is then shown as a solid line that follows the overall price movements. A lot of traders use more than one moving average on their charts to show the exact points of entry into the market.
The Foreign Exchange Confirmation Indicator
Once you have found a trend it is best to confirm what you are seeing. There are a number of trend confirmation indicators which can be used. However, the most common is the MACD histogram. It is important that you use these indicators in conjunction with the trend finding and following tools.
The MACD histogram is a good indicator of the strength of a trend. You need to know the strength of a trend because you trade on it. If the strength is low then the trend may not be worth trading on. However, if the strength is high then the trend will continue for a while and you should trade on it.
The Overbought and Oversold Indicator
All trends will come to an oversold or overbought level. This level is just before the trend turns and you need to identify where the trend is in terms of this. There are a few indicators that can be used for this. However, the most common is the 3 day RSI indicator.
When you use this indicator you are looking at the sum of the down and up days over a set timeframe. The RSI indicator will give you a reading between 100 and 0. When the reading is close to 100 then the forex rates will be down. A value of 50 is considered neutral and the trend is not in danger of reversal.
The Profit Taking Indicator
It is important that you know when to enter a trade, but you also need to know when to exit a trade. Indicators that can help you with this are the profit taking indicators. It is important that you choose an indicator that works well with your strategy. The most commonly used indicator is the Bollinger Bands.
Bollinger Bands will tell you when to take profits on a trend when a certain level is reached. With long trades you should take the profit when the price is close to the upper band.