The foreign exchange market is constantly evolving and growing. It is already the largest and most liquid market in the world. So Forex traders are always on the lookout for price movements and patterns. To do so effectively, they rely mainly on analysis. While there are different types of financial analysis available, the most commonly used is technical analysis. Using this technique, traders assess previous market data and speculate on the future behavior of the market. In order to conduct this process efficiently, traders and experts use tools and indicators. In fact, there are numerous metrics out there, but not all of them are equal. In this article, we rounded up the best indicators.
What Is a Forex Indicator?
If you have just started your trading experience, it’s possible you’re not yet familiar with Forex indicators. So, what exactly are they? Essentially, they are tools that enable traders to get a better grasp on price fluctuations and assess the direction of a market or particular security. As part of technical analysis, these metrics are used to identify patterns and previous performance.
Clearly, there are many types of indicators and metrics for each type of analysis. So technical indicators differ from fundamental ones. The latter include earnings, revenue, profit margins, and the like. They are mostly used by investors and long terms traders. Accordingly, Forex traders use technical analysis more because it allows them to detect price changes in a practical way when they trade. Indeed, results are reflected inside the price chart, making the analyst’s job simpler.
The Top 7 Forex Indicators
Since each metric has a unique purpose suitable for one or the other trading tactic, there isn’t a clear-cut answer to which ones are the ultimate best. Nonetheless, some of them have become staples that every trader needs to be aware of and eventually learn to master.
A very popular Forex indicator is the Moving Average Convergence Divergence (MACD). This metric highlights the relationship between two moving price averages. It is considered a trend-following momentum indicator. There are three ways the MACD can be interpreted. First, as a crossover, when the metric drops below the signal line in a bearish move or if it goes above the line in a signal to buy. Most traders observe the movement and wait for a confirmation of a cross-over prior to entering a position. The second reading is a divergence, when the security price varies from the MACD, it is a sign of the end of a trend. Lastly, the dramatic rise method is when the MACD rises sharply, it is a hint that the security is overbought and will go through a correction back to the normal price.
Money Flow Index (MFI)
The MFI is a momentum indicator that uses an instrument’s price and volume in order to make a prediction on the consistency of a trend. Indeed, many traders monitor this metric and wait for the perfect moment in which the MFI moves in a direction opposite to the price. This divergence is considered as a sign that the ongoing trend is changing.
The OBV is an indicator used to measure the negative and positive volume flow of a certain security relative to its price over a period of time. This is a straightforward metric that holds a cumulative total of volume by adding or subtracting each period’s volume according to the price movement. In addition, it combines the volume with the price movement. As such, traders follow it and wait for a signal of an upward swing or downward trend.
The Accumulation/Distribution Line is another popular indicator. This metric takes into account the trading range for a select period as well as the closing price of a security. Thus, it provides trades with a more accurate picture of the money flow.
Bollinger Bands is a Forex metric that consists of two bands. These lines are two standard deviations below and above a moving average, which appears between the two bands as a line. The wider the bands, the greater the volatility. Similarly, the closer the gap, the less volatile the asset.
Market Facilitation Index (BW MFI)
The Market Facilitation Index (BW MFI) is a Forex indicator that highlights price variations for a specific tick. The values of this indicator are simply an indicator of change.
The metric known as CCI helps traders make a decision to enter a long or short position. It is quite straightforward and it is considered to be very accurate. CCI is often seen as a good indicator to follow if you a simple trading style. Indeed, this measure is very popular.
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