Using Forex Technical Indicators in Forex Trading

As the largest financial marketplace, with trillions of dollars transacted on average business days, the forex market has increasingly attracted speculators who seek to profit from exchange rate movements using forex technical indicators.

Although trading currencies certainly involves taking considerable risk, the rewards from such an endeavor can prove substantial for those willing to take it seriously.

Furthermore, perhaps due to their ability to objectify the frequently-emotional trading process, technical indicators have enjoyed considerable popularity among forex traders. This phenomenon has expanded further since modern computing power, software and the Internet has brought them to just about anyone’s desktop.

An even more recent development involves the ability to automate technical trading algorithms consisting of combinations of indicators and other market conditions that generate forex trading signals. Such algorithms can automatically size and initiate positions, and then enter liquidating orders to take profits and limit risk.

Benefits of Forex Technical Indicators

Although technical indicators alone do not do all of the work for you when it comes to making a forex trading decision, they can certainly get you started on the right foot.

Basically, due to the mathematical nature of their computation, the indicators often provide a quick way to distill huge amounts of market information into much smaller packets upon which trading decisions can more readily be based.

Furthermore, due to the objective nature of the signals they generate, using technical indicators when trading can help you avoid some of the emotionally-based pitfalls that commonly affect the success of traders in any market.

Since crowd psychology can often drag traders along with it, if you do not have strict guidelines to follow which technical indicators can provide, this can present another serious risk to your profitability.

Also, an especially useful quality of the volatility indicators arises from the fact that they can provide a general sense of what magnitude of trading risk currently prevails in the market. This allows traders to size their positions according to the amount of risk they wish to take and thereby protect their accounts from excessive market instability.

Interestingly, interpreting the signals from some indicators involves considering not just the level of the indicator itself, but also its slope or first derivative as well. Trend lines and moving averages are sometimes also drawn over indicator charts.

This demonstrates that the complex information contained in the indicator cannot easily be observed by a person watching market prices evolving over time. Accordingly, traders using the indicator can gain an important informational advantage when trading over those who do not.

Forex Technical Indicator Types

No matter which market you wish to trade, technical indicators can provide a good basis for developing an objective trading strategy. Naturally, you will want to choose those that suit your preferred trading strategy and which you can readily observe and understand.

The four primary groups of trading indicators are organized below by the type of information they generally provide:

1. Trend

These indicate the existence, direction and/or strength of trends in market prices so that you can trade along with them. Examples are: Moving Averages, the Directional Movement Index (DMI), the MACD Oscillator, the Forecast Oscillator and the Parabolic SAR.

2. Momentum

Momentum oscillators indicate how strong market moves are and tend to reverse in advance of the price, giving them predictive power. Some also show if the market is overbought or oversold and therefore likely to begin correcting. Examples are: the Stochastic Oscillator, the Relative Strength Index or RSI, the Commodity Channel Index and the Chande Momentum Oscillator.

3. Volatility

Volatility gives traders an idea of how much risk is involved in trading a market and helps them size positions accordingly. This group includes: Historical Volatility, Implied Volatility, Average True Range, Bollinger Bands and the Projection Oscillator.

4. Volume

Data related to contract or trading volume provides useful information which traders can utilize when confirming breakouts and reversals. Examples include: Volume, On-Balance Volume or OBV, Open Interest, Marc Chaikin’s Money Flow indicator and the Ease of Movement indicator.

By using forex technical indicators from one or more of the above groups to objectify trading and provide useful directional guidance, traders can advance further toward the goal of profiting from forex trading.