Forex Indicator Tools

Forex Indicator Tools

The increasing prevalence of computers in regular trading activity has led investors to look for new ways to make price forecasts in the markets.  Because of this, a critical component of any sufficient forex education will need to see the implementation of some non-traditional strategies.  One of the best examples of this can be seen in technical chart analysis, which seeks to assess historical price activity as a means for forecasting where valuations will head next.  When these price forecasts are accurate, some significant gains can be made — even on the shortest time durations. 

“Technical analysts tend to argue that economic data, of even the identity of the asset itself, are largely irrelevant and not necessary for making successful trades,” said Haris Constantinou, currency analyst at TeleTrade.  Of course, there are many market traditionalists that would disagree with these assertions and instead suggest that economic fundamentals are the only things that should be used when making market forecasts.  But even if you disagree with technical chart analysis, its growing presence in forex markets is undeniable.  Here are some of the key tools needed when implementing these “technical” strategies in forex trades. 

Indicators and Oscillators

Some of the most basic technical tools fall into the category of indicators and oscillators, which help traders identify regions where prices are either oversold (have been sold-off too excessively) or are overbought (which suggests prices have risen too high, too quickly).  Some of the most popular tools in this category include the Moving Average Convergence Divergence (MACD), and the Relative Strength Index (RSI). 

The RSI, for example uses a 0 to 100 scale, where anything below 30 is considered to be “oversold”.  This essentially implies that the asset price has become too cheap and will likely reverse higher. This information can be used to establish “buy” positions. In contrast, numbers above 70 suggest that prices are “overbought”.  This essentially implies that the asset price is now too expensive and likely to start falling lower.  This information can be used to establish “sell” positions.

Fibonacci Retracements

Another common tool is the Fibonacci retracement.  With this tool, traders will look for a significant price move in either direction (either bullish or bearish).  Since prices tend to move back toward “the mean,” traders can play against the initial price move.  For example, if a currency pair moves from 100 to 200, and prices fall back to 150, we would say that prices have retraced 50% of the initial move.  These significant percentage areas can then be used to establish new trading positions. 

Moving Averages

Since prices tend to gravitate toward their averages, Moving Average indicators can also be used.  These averages tend to fall into two categories: Simple and Exponential.  Simple moving averages simply show the average price over a given time period, while Exponential moving averages place greater weight at more recent intervals.  Buy positions are taken when prices move above their moving averages, while sell positions are taken when prices move below their moving averages.