The role that the indicators play in Forex Trading cannot be ignored. Indicators are the solution to the problems of guessing trend reversal. There are endless indicators to study so to make study easier for the beginners, the indicators can be categorized. The two important categories of indicators are leading indicators and lagging indicators. The main difference between both the categories is that the Leading indicators give trading signals before the market turns and the Lagging indicators follow the trend. So if a Forex trader is using the signals of the Leading indicators then he should open positions involving low risk as compared to the Lagging indicators. Some of the technical indicators are discussed below.
MACD is a popular technical indicator that the majority of the investors and traders use. MACD is easier for the beginners also and its application is also simple. Two group of moving average is used by this technical indicator to determine the market price. A MACD can be divided into two types, a positive MACD and a negative MACD. Three types of bullish signals are given by the Positive MACD and these are Positive Divergence, Bullish Moving Average Crossover and Bullish Centre line Crossover. Three types of bearish signals are also given by the Negative MACD and these are Negative Divergence, Bearish Moving Average Crossover and Bearish Centre line Crossover.
Bollinger Bands are very useful for the traders and investors. This concept was introduced by John Bollinger. Bollinger Bands is a technical indicator used to determine price action and the volatility of the market. Bollinger Bands can also tell reversals. The three bands complete the Bollinger Bands technique. These bands are the upper band, lower band and the middle band. The three major functions that the Bollinger Bands perform for the traders are as listed below.
Bollinger Bands spot a new trend and a Breakout.
Bollinger Bands tell the correct timing of entry and the traders and investors should follow this timing.
Bollinger Bands are also helpful in spotting market reversals.
The concept of Parabolic SAR was given by J. Welles Widler. The term Parabolic SAR is made up of two words, Parabolic and SAR in which parabolic represents the curve shape and the SAR represent the Stop level and the Reverse level. This indicator is also called a reversal system because with the help of this indicator, traders and investors can follow the stop loss level. This indicator determines the reversal points and stop points but is more accurate in determining stop points. Parabolic SAR can be used to set the trailing stop loss successfully because the exits determined by this signal are more accurate.
Stochastic is a good technical indicator that if used with other indicators such as MACD will give the traders a chance to earn maximum profit on their investment. This concept was introduced by George Lane. Stochastic is sometimes also called as Momentum Indicator and is used to determine an overbought or oversold position of the market. Overbought position is if the price of currency that has advanced a lot in less time and an oversold position is one in which the price of the currency has moved away. For the traders, this is an opportunity o earn high profit.
RSI is another great indicator introduced by J. Welles Widler. RSI is the abbreviated for Relative strength indicator. RSI is very useful in finding tops and bottoms of any currency and predicting reversals. Using RSI, traders and investors can locate the overbought or oversold areas on the chart.