How Forex Indicators Work

Are you interested in learning how to use analytical indicators in forex trading? Many people use these kinds of helpful tools every day, and not just with forex but with stocks, bonds, precious metals, and any asset whose prices are in a constant state of change. Remember that you don’t need to understand the detailed mathematical formulas that underlie the following techniques. The important point is to know what each one does and how to read them in the context of forex transactions. Three of the key components of price fluctuation are volatility, momentum, and trend direction.

Forex Indicators

Volatility

Markets go through periods of high and low volatility. You attempt to answer with a volatility indicator when low price fluctuations will end, and large ones will begin, and vice versa. When you’re at the forex trading stage for beginners, it helps you learn about three tools in common use that can uncover volatility: chandelier exits, ATR (average true range), and Bollinger bands. We’ll look at the last one as an example of the category because it’s easy to understand.

Most different types of platforms have the Bollinger bands built into their capabilities. The bands define upper and lower price channels on a chart, with the middle area being a 20-day moving average. The high limit line is two standard deviations above the middle, and the low is two standard deviations below. Traders use the bands to visualize how wide range chart values might go and see when a period of higher or lower volatile pricing is about to begin.

Momentum

The RSI (relative strength index) is one of the most beloved trading tools among all investors. That’s because, when used right, it can give information about how strong a given trend is, how long it might last, and when to buy or sell. The RSI ranges from a low of 0 to a high of 100. It’s designed to show when price momentum is about to change, usually with the key numbers of an RSI of 30 and one of 70. A value of below 30 and rising means prices are about to enter an upward trend. When the value is above 70 and falling, the upward trend is about to reverse.

Trend

Of all the things investors want to know, the general direction of the trend is at or near the top of the list. Moving averages (MAs) are the accepted way to do this. These handy mathematical lines live up to their names because they reveal a moving average line of the price, defined by a certain number of prior days’ data, typically 50 and 200 days.

How can you use this information in the forex markets? Many people employ MAs to wait until the 50-day crosses above or below the 200-day line. Often, these cross-overs can indicate a change in the major trend. An uptrend is typically revealed when the 50 crosses above the 200. The reverse is true for down-trends. It’s common for people to use trend analysis like MAs to confirm other indicators, such as momentum or volatility data.