The best indicators to help with your trading
Trading forex requires a depth of insight into the trend of the market. The trader needs to understand the direction of the market and be adequately guided. The essence of this is to know exactly when to trade or take the right position.
Traders are not left to hazard guesses; indicators have been designed to guide them. In this article, the best 5 indicators are carefully x-rayed.
So, what are the best indicators traders can use? Below is a list of the top reliable indicators we have chosen after a careful market survey.
List of best 5 indicators
Though it is difficult to say a particular indicator is better than others, we have selected these after we have tested them and also based on the fact that a lot of traders trust them.
1. The Relative Strength Index (RSI)
The Relative Strength Index was designed by J. Welles Wilder to estimate the speed and change of price movements. RSI, which functions as a momentum oscillator, is popular among traders because of the relative simplicity of interpreting it.
RSI is plotted on a distinct scale; it comprises of a single line calibrated from 0-100 that contrasts the strength of the stock's recent gains and recent losses. The RSI is useful in identifying overbought and oversold conditions. It also authenticates other technical indicators and alerts traders of possible reversals through divergence with price trends.
Calculating RSI involves multiple steps of computing relative strength by drawing a contrast between gains and losses. This is attained by observing the following:
- Calculate Average Gain: total gain/period
- Calculate Average Loss: total loss/period
- Calculate Relative Strength (RS): to obtain relative strength; the average gain is divided by the average loss; Average gain/average loss.
Therefore RSI = [ 100 -(100/(1+RS)]
2. Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence is a momentum indicator that follows the trend and indicates the correlation connecting two moving averages of a security's price. MACD looks quite difficult to adopt by inexperienced traders who do not yet understand the awesome functionalities it offers.
The more experienced traders use MACD more dynamically; in most cases, in combination with other appropriate tools. Although MACD is a lagging indicator, it could be converted into a momentum oscillator. To do this, you subtract the longer moving average from the shorter moving average.
MACD is an example of a trend indicator; it is made up of three components, namely; a fast line, a slow line, and a histogram. Its primary advantage is its ability to determine a trend reversal. It can also be used to identify the top and bottom lines of trends which helps the trader to reduce the risk on his investment.
3. Bollinger Bands
The Bollinger bands are a volatility indicator invented by financial analyst John Bollinger. It is one of the best indicators for Forex trading out of the several volatility channel methods available for Forex traders.
Bollinger Bands are among the most popularly used technical indicators. They are easy to apply and are useful as accurate trends, volatility, and momentum indicator. They can also help to identify new trends and the end of trends, making them truly multiple purpose indicators.
The Bollinger band uses two parameters:
1. The duration for the moving average is usually 20 days.
2. The number of 2 standard deviations that you want the band placed away from the moving average in stock trading.
Used in combination with an oscillator to generate buy or sell signals
• If Bollinger Bands are used in conjunction with an oscillator such as Relative Strength Index (RSI), it generates buy and sell signals when the Bollinger Bands signify an overbought/oversold market at the same time the oscillator signifies a divergence.
When charted automatically by a trading platform, Bollinger bands are very easy to use and can add another scope to plot analysis for a trader.
4. Stochastic Oscillator
George Lane, a market technician, developed the Stochastic oscillator to identify when security is overbought or oversold. To achieve this, it equates a security's recurrent closing price to its price range for a defined period.
The principle employed by the Stochastic Oscillator is the probabilities required with random distribution. The Stochastic Oscillator is symbolized by %K; it is used to compare the evolving price action to a relative average value. The derivation formula is given below:
%K = ((Closing Price - Range Low) / (Range High - Range Low)) * 100.
The Stochastic Oscillator is an indicator that does not go after price or volume but indicates the speed, or momentum of a price. As a result, it helps to predict a change in the direction of the price.
The Stochastic oscillator is a popular indicator among traders for identifying a bullish or bearish trend in the market.
The adaptability of Stochastics makes it a methodology adopted by many experts and new traders alike.
5. Average Directional Index (ADX)
The Average Directional Index is an outstanding indicator. ADX is used to measure trend strength. ADX computations are based on a moving average of price range increase over a specific period. Most indicators either work best for trending markets or range-bound markets, but few can execute both tasks effectively.
However, the ADX, which can be used as a single indicator to measure the strength of a trend, is also a component of the Directional Movement System developed by J. Welles Wilder. The average directional index (ADX) is used for deciding when the price is trending strongly. When you trade in the direction of a strong trend, you reduce the risk and increase the prospect of making a profit.
ADX identifies trending conditions in addition to helping the trader find the strongest trends to trade. Its ability to measure trend strength is a great advantage for traders. ADX also recognizes range conditions; that way, a trader does not get trapped trying to trend trade in sideways price action. ADX also notifies the trader of changes in trend momentum, addressing the issue of risk management in the process.
This article was submitted by LegacyFX.
