Operations concept of Forex indicators. Pros and cons
The popularity of the technical indicators is growing every day. Can we find proper explanation to this? How shall we deal with them?
Indicators are your assistants in trading, but they cannot substitute a professional trader. First of all, you should understand the basic principles of their functioning. Note also, that it is helpful to use several indicators in trading. Thus, you will be able to obtain a comprehensive picture of the market. So, let’s review indicators of the technical analysis.
What is the basic structure of a technical indicator?
First of all always remember that a technical indicator is based on the mathematical principles as a result of programming. That is, Forex indicator is a program invented by IT experts in the currency market trading. They developed user-friendly interface, which demonstrates results of some calculations. An indicator uses mathematical algorithms in order to analyze a trading instrument selected by you. Finally it demonstrates you results as charts, graphs and bars which are easy to understand. All Forex indicators are built on this principle.
You can download the indicators online and place them in your terminal. Usually they are free of charge. Some terminals have built-in indicators. There are also terminals, allowing you to create your own tools of technical analysis.
However, we will speak about terminals some other time. So, you have downloaded an indicator in your trading terminal. What data does it use in order to help you make the right trading decisions? There are five types of datum, which is used in technical indicators. They are: trading volume, opening price, closing price, the highest price and the lowest price. The program has built-in formulas and, substituting required values, the indicator can give signals to buy or to sell.
Types of technical analysis indicators
- Trend indicators
This type of indicators helps traders to verify trend of price movement. The indicator usually creates graphs of price movement, showing a trend line, or not showing a trend line, if there is no clear trend. The indicator gives signals of possible trend reversal or correction in price. The indicator also gives signal if the price goes back to the trend channel. The most popular trend indicators are MACD, ADX, Moving Average.
Oscillators are the leading indicators. Traders use them when market trend is not clear. The most popular oscillators are Stochastic, RSI и CCI.
- Volume indicators
This type of technical indicators assesses trade volume on the instrument at a certain time and at a certain price. This indicator gives you information on the number of contracts signed for the instrument; however, the information about the volume of some contracts is not available. It means that the indicator can only give information about the number of contracts, not revealing details of the trading volume, so we do not know if a contract is made for 100 USD or 1000 USD. Volume indicators can be used in addition to some other indicators.
- Indicators of support and resistance levels
This is one of the most popular types of indicators, which is widely used by professional traders. This indicator displays periods of price correction on the chart.
Top -10 Forex indicators
What are the best indicators? Let’s review top 10 Forex indicators right now.
- TSI. Is a momentum oscillator based on a double smoothing of price changes. The indicators uses two lines of different colors to display signals to buy or sell. The first line is fixed, while the other can be located either below or above the first one. The layout of the second line gives us signals to place either a sell or a buy order. This indicator is suitable for a scalping trading strategy.
- William New. This is an oscillator helping to identify trend direction on the basis of which a trader can determine entry or exit points. William New is an update of the William oscillator.
- 4Pma. This indicator shows a trader the best moment for entering the market.
- Braintrend. This indicator is easy to use. It makes the minimum calculations for developing a buy or a sell signal. It is advisable to use this indicator in addition to some others.
- Camarilla. Camarilla pivot points - is a one of the frequently used technical indicators. This is an indicator of support and resistance levels of the existing trend.
- Darma System. This is a trend indicator, which helps determine trend movement and entry points. Before using this indicator for a real trading we suggest to use it first on demo accounts.
- Day impulse. This is a trend indicator. It is recommended to use this indicator at the periods of low volatility in the market.
- Digital CCI. The main target of this indicator is to give signals of trend reversal.
- Elliot Wave Oscillator. This indicator will allow you identify current market trend and indicates its strength.
- Fruity Pebbles Indicator. This indicator gives signals of the best moments for entering the market. It also helps evaluate at what point a take profit shall be placed.
Specifics of trading with the help of indicators
The main advantage of using indicators is the fact that that your emotions will not affect trading results. An indicator is a program based on the economic data and mathematical formulas. Everything is strictly rational unlike human being. There is a special term for strategies with the use of indicators. They are called mechanical strategies. It means that trading with the use of indicators you exclude the influence of the irrational psychological factors on your trading decisions.
Note that, trading indicators have their drawbacks. Technical indicators usually respond the market changes slightly later than the actual change takes place, as some time is required to gather the data and analyze it. If you do not react adequately yourself, the indicator may become a reason of your losses.
What to choose?
It is advisable to use both technical and fundamental market analysis. By combining two basic methods of analysis we will be able to earn high profit. Choose a few indicators, which will confirm the correctness and disprove your trading decision. Do not rely only on the technical indicators.
Good Luck in trading!