Forex technical indicators can make all the difference for those trading or starting out. When you are new to trading, it’s hard to know where to turn for quality guidance. There is typically not a one-stop solution to succeed, but this way there is a place to bring together many different tools, with your knowledge, to find the best way to navigate for you. Here are the most useful technical indicators in Forex.
Simple Moving Average
To confirm a trend, the best Forex indicator is the simple moving average or SMA. The SMA usually guides for shorter time periods as with a longer time frame it tends to flex more, as any average will. Calculating the SMA is probably the easiest of all the technical indicators as you work out the average of the closing prices during your time frame.
This average will help guide you through continued growth or decline but shows no indication of a market shift. Traders will often use the SMA to identify when growth is slowing down, or when a decline is continuing to build speed.
Exponential Moving Average
The Exponential Moving Average, or EMA, is the indicator used in the Forex trading circle that allows traders to respond more quickly than when using the simple moving average. To calculate the EMA, the formula looks something like this:
EMAt = (a)(current price) + (1-a)(EMAt-1)
With this calculation guide, “a” is the average, and EMAt is the EMA from the previous period. As you use this calculation more, it will become second nature, but it’s hard for many people to pick up the process at first. Don’t be discouraged, and the EMA indicator can severely impact your ability to forecast market shifts.
The Fibonacci sequence is a series of numbers that progresses based on the sum of the two prior numbers in the sequence. This sequence has some indication of the market’s trends after a big market shift. This is called the Fibonacci Retracement. The concept is that after a huge price move, the stock will move in the association of support and resistance, which will occur close to the Fibonacci ratios. Essentially these act as leading indicators, which is an alternative to working solely with moving averages.
Where other indicators often offer a “forest” or “the trees” viewpoint, Aroon offers both. This technical indicator gives a ton of information, but the tradeoff is that you have to know how to interpret it and how to manipulate it. Aroon identifies if there is a trend, the development of the trend and how strong the trend is, making it massively useful for full-time traders. The indicator relies on using recent highs and lows where the highest high shows the “bullish line” and the lowest low shows up on the “bearish line.” To see this in action if the bullish line is near the top of the 0-100 scale and the bearish line is right around 0 then you have a strong bullish trend. Or in other words, highs are often, and lows are rare.