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Different Types of Technical Indicators: A Trader’s Watch List

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What are Forex Technical Indicators? Why are they Important? These are some of the questions that Forex traders ask themselves. Well, in this article we are going to expound on different types of Forex technical indicators and their importance in the currency market.

Forex market has become one of the most popular money making hub across the globe. Traders from all facets of lives are putting their best feet forward to tap into this fast growing money making business. This is essentially because of the fact that opportunities available to make profits in Forex market are much greater than opportunities found in any other investment. This does not mean that when you are trading in currencies there is no risk that is involved. Just like in any business venture, there is risk that is involved but it is upon you as a trader to use the available trading tools effectively to mitigate the risks. One of the tools that you have to learn and understand how they work in order to make huge profits in Forex market is the technical indicators. When you master the art of using multiple technical indicators to track trends in the market then you will witness great returns on your initial investments. You will also lower your chances of making losses as you trade in currencies.

Technical indicators are basically mathematical formulas that help traders to recognize and take advantage of various trends in the Forex Market. These tools predict market movements that if analyzed properly will enable a trader make good tidings. The currency exchange market is a volatile market and as such it has several ups and downs. Learning various indicators will thus be very instrumental in your trading. Using different indicators will give you a better idea of the trends in the currency market so that you can make a well calculated and wise decision in your buy or sell options. The various types of Forex technical indicators are:

Strength Indicators

 

Strength indicators are indicators that describe the intensity of the currency exchange market opinion on a certain price by evaluating the market positions taken by different participants in the market. Volume and open interest are the essential ingredients of strength technical indicators.

Trend Indicators

These type of technical indicators smooth price data out so that a consistent down, up or sideways trend can be seen easily. Some of the indicators that falls in this category are Moving Averages and Trend Lines.

Volatility Indicators

Volatility refers to the magnitude of the day to day price fluctuations in the market whatever the direction of trend is. This means that changes in the volatility in the market signifies changes in prices. Indicators in this group are Bollinger Bands.

Momentum Indicators

Momentum indicators determine the strengths or weaknesses of trends as they progress over time. Momentum is lowest when the trend changes while highest when trend starts. When momentum and price diverge, it signals weakness. If price extremes happen with weak momentum then it suggests an end of the movement in that particular direction. On the other hand, if momentum is trending strongly and prices are flat then it shows a potential change in price direction. Indicators such as Moving Average Convergence and Divergence (MACD), Relative Strength Index (RSI) and Stochastic are all momentum indicators.

Cycle Indicators

These types of technical indicators usually indicate repeating market patterns from different recurrent events such as elections, seasons and the list goes on. Cycle indicators determine the timing of a specific market pattern. An example of Cycle indicator is Elliott Wave.

Support/Resistance Indicators

 

Support and resistance indicators usually shows different price levels where there is a repeated rise or fall of prices of currencies in the market and then reverse. This is due to supply and demand of currencies in the Forex Market. Example is Trend Lines indicators.

If you use these technical indicators appropriately in your trading whether you are a newbie or advanced trader, the yields will be very appealing.

We wish you GOOD LUCK as you trade and may your star shine brighter every day in the Forex Market.

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My understanding of strength indicators in FX is that they are calculated solely on price. Open interest is for futures.. I guess you could use currency futures as a proxy, though it could be inaccurate.

 

Strength comes from relative strength in stocks, i.e. comparing individual security performance to an index. Performance being defined by momentum rankings.

 

With currencies, there is no 'index', rather each currency pair with same base (e.g. EUR) is used to find the average momentum ranking for the Euro itself, giving a EUR line... That line can then be compared with say the USD line and find correlations with EURUSD rate 'trends/breakouts/ranges'... No volume used.

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"...... there is risk that is involved but it is upon you as a trader to use the available trading tools effectively to mitigate the risks"

 

If any of the aforementioned tools are good for one thing it is to determine entries.

 

Not exits.

 

And it is exits that manage risk and is the main factor in whether or not a trader will be successful or not.

 

But price action is the best way to set exits - not squiggly lines.

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Trading in the direction of a strong trend reduces risk and increases profit potential. The average directional index (ADX) is used to determine when price is trending strongly. In many cases, it is the ultimate trend indicator. After all, the trend may be your friend, but it sure helps to know who your friends are.

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"Just like in any business venture, trading in the Forex Market involves risks but as a trader you have to utilize the available technical tools effectively and put formidable strategies in place in order to rip huge benefits from the currency market.

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Professional training and learning a specific methodology comes in handy to perfect your trading. A methodology is a rule-based trading application that teaches the Forex trader how to identify the most frequently occurring technical price pattern and, more importantly, the pattern with the highest probability to achieve the intended profit objective.

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