One of the key concerns for Forex traders is knowing when to exit or enter the market. To be able to know the best time to enter and exit, you will have to use Forex indicators. These indicators come in handy when you want to understand complicated market movements. They also help traders understand an ongoing trend’s momentum. These Forex indicators are inferential in making informed and disciplined decisions.
Pros and Cons of using Technical Indicators
Pros
- Combination capability
You have the option of combining indicators and this makes it easy for you to clearly understand the Forex market. For example. You can combine Fibonacci levels with Moving Averages. Likewise, you can combine Stochastic with other indicators to get accurate signals.
- Confirmation tool
Forex indicators make excellent tools for confirmation and that is why they are also used by experienced traders. For example, technical traders can identify candlestick patterns and take trades based on the patterns. They can use technical indicators such as Stochastic or RSI to confirm the accuracy of the signal given by that pattern. If the pattern signal is supported by the indicator, traders can safely make trades.
- Easy decision making
Using indicators when trading will allow you to make quick trading decisions relatively. You will come to see that there are some swift decisions that will be impossible to make without the help of indicators.
- Simplification
Indicators are useful especially for novice traders who are yet to get conversant with reading price charts. Indicators also show you how strong the market is at a given time. For example, finding a trend’s direction using Moving Average. You can also find oversold and overbought areas using a stochastic indicator.
Cons
- Lagging
Lagging indicators are a hindrance as they portray events that already took place. While they do add value to trade based on indicators, you can’t completely use them to take trades.
- Not for PPA traders
Technical trading also involves PPA trading. It is solely based on an asset’s price movement. As such, PPA traders tend to find trading using indicators to be redundant. The reason being, they have an idea as to why the price movement is behaving the way it is. That is why indicators can also be said not to add value to PPA traders.
- Not enough background information
Novice traders who use indicators aren’t provided with enough information on the happenings of a chart behind the scene. The downside is, if they get comfortable with this they may never be pro technical traders. These traders also won’t be able to tell if the signal that has been generated is inaccurate or not. Thus, it’s vital to understand the movements of indicators to be able to make informed decisions.
The best indicators to use when trading Forex currency
Here are some useful indicators used by Forex traders:
Elliot Wave
This indicator shows that the psychology of investors is what drives movements in financial markets. Elliot Wave gives traders more profitable and detailed results.
Swing sequences
This is used by those traders who benefit from swinging prices. Here, traders identify a trend, hold the trade for a while. It is best used in combination with Elliot wave.
Fibonacci extensions
These are used to determine the profit targets. It helps traders to know the distance the price could go before a finish. Common extension levels include 261.8%, 200%, 11.8% and 61.8%.
Fibonacci retracements
These are used to determine all possible levels of resistance and support. Afterwards, traders are able to know where to exit or enter the market.
Trendlines
These are the most common and simplest technical analysis tools used when trading Forex. Even so, it remains an underutilized indicator. Here, traders look for trend patterns to be able to generate trade opportunities.
RSI
This is an accurate and brilliant tool that gives signals before any price event. It also helps traders identify ongoing trends and know if the market is oversold or overbought.
Conclusion
The Forex market is quite volatile as it experiences daily fluctuation. This makes the market a very tricky one with potential for making losses and profits. The above listed indicators and tools will make it easy for newbie traders to understand trading currencies. When you use the correct indicator, you will be able to create an attractive portfolio.
