Four types of chart indicators fx traders should know:
A chart indicator is a trend in forex trading that helps to measure the strength of the trend that is going on in the market for the traders before they trade. In terms of giving you a feeling for the strength behind the move, these chart indicators comes at help. There are commonly four types of chart indicators, every forex trader should know before he/she actually starts trading.
Indicator 1: A Profit-Taking Tool
A forex trader requires a profit taking tool indicator to help himself take a profit on a winning trade. The trader here is left with many choices open. A trader holding a long position might consider taking some profits if the three-day RSI rises to a high level of 80 or more. Conversely, a trader holding a short position might consider taking some profit if the three-day RSI (Relative strength index) declines to a low level, such as 20 or less.
A popular indicator known as Bollinger Bands® is another type of profit taking tool. This tool takes the standard deviation of price-data changes over a period, and then adds and subtracts it from the average closing price over that same time frame, to create trading “bands.”
Indicator 2: A Trend-Following Tool
Every trader wishes to make money at its best. Therefore it is possible to make money using a counter trend approach in trading. It is advised for most of the traders to recognize the direction of the major trend and attempt to profit by trading in the trend’s direction. This is where trend-following tools come into the picture. Many traders try to use them as separate trading system; while this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long position or a short position.
To counterpart this, a simple moving average represents the average closing price over a certain number of days, which in turn helps the traders recognize the trends in the market.
Indicator 3: An Overbought/Oversold Tool
After following the direction of the ongoing trend, a trader must decide whether he or she is more convenient jumping in as soon as a clear trend is established or after a pullback occurs. However, if the trend turns to be bullish, the choice becomes whether to buy into strength or buy into weakness. But if the trader decided to get in as quickly as possible, you can consider entering a trade as soon as an uptrend or downtrend is confirmed. On the other hand, you could wait for a pullback within the larger overall primary trend in the hope that this offers a lower risk opportunity. For this, a trader will rely on an overbought/oversold indicator.
This indicator thus calculates the overall sum of up days and down days over the window period and then calculates a value that can range from zero to 50. If all of the price action is to the upside, the indicator will approach 50; if all of the price action is to the downside, then the indicator will approach zero.
Indicator 4: A Trend-Confirmation Tool
After knowing the trend-following tool, now it would be nice to have a way to gauge whether the current trend-following indicator is correct or not. For this, we will employ a trend-confirmation tool. Much like a trend-following tool, a trend-confirmation tool may or may not be intended to generate specific buy and sell signals. Instead, we are looking to see if the trend-following tool and the trend-confirmation tool agree.
In essence to this you can contact various Forex brokers for assistance and to know the right trend in the market. They will also tell you if both the trend-following tool and the trend-confirmation tool are bullish, then a trader can more confidently consider taking a long trade in the currency pair in question.