Often, traders overcomplicate matters, especially when they are beginners. Traders usually opine that a sophisticated trading strategy complete with numerous moving parts could be better. Only a few foreign exchange traders understand the significance of adopting simple trading strategies.
A simple strategy can be what a trader needs to succeed in the forex market. This is because it allows you to react quickly and causes minimal stress. If you are a trader in the forex trading market, it is crucial to determine simple yet effective strategies to facilitate the identification of trades. Once you achieve success with one strategy, you may want to stick to it before testing another one.
Understanding Trading Indicators
Whether you are venturing into the commodities, forex, or share trading market, using the technical analysis element of your strategy is crucial. This approach includes evaluating different trading indicators. Trading indicators are analytical calculations that are drawn as lines on a price chart. They can help forex traders to identify specific trends and signals in the market.
There are various types of trading indicators, which include lagging and leading indicators. A leading indicator is a prediction signal that forecasts future price fluctuations. A lagging indicator, on the other hand, evaluates past trends and displays momentum. Traders can use their risk appetite and knowledge as a standard to choose the trading indicator that best suits their strategy. Here are some of the trading indicators you should beware of.
· Moving Average (MA)
The moving average is an indicator that helps determine the course of a current price trend without obstructing shorter-term price increments. The moving average indicator integrates a financial instrument’s price points over a particular time frame. It divides the outcome by the total data points to get one trend line.
The length of the moving average determines the amount of data that will be used. For instance, a 200-day moving average needs 200 data days. You can evaluate the resistance and support levels using the moving average indicator and determine the previous price action. You can use the same method to figure out future patterns.
· Stochastic Oscillator
This indicator compares a specific asset closing price to a scope of its price steadily, demonstrating the strength and trend momentum. It utilizes a scale of 0 to 100. A reading that’s below 20 often indicates an oversold market, while an above 80 reading, represents an overbought market. However, in the presence of a robust trend, a rally or correction may not develop.
· Moving Average Convergence Divergence (MACD)
The MACD indicator recognizes shifts in momentum by comparing two MAs. It can assist traders when it comes to identifying potential sell and buy opportunities around resistance and support levels. Convergence means that two MAs are integrating while divergence means that the two MAs are dispersing from one another. If MAs are converging it is an indication of a decreasing momentum. When they are diverging, it means that momentum is increasing.
· Bollinger Bands
This is an indicator that offers a range within which an asset price trades. The band’s width decreases and increases to indicate recent volatility. The closer the bands get to one another the narrower they will be and the lower the recognized financial instrument’s volatility. When the bands are wider, then the perceived volatility will be higher.
Bollinger bands are essential when it comes to determining when an asset is trading out of their normal levels. They are often used as a long term movement prediction strategy. When a price moves outside the top limits of the band frequently, it can be overbought. On the other hand, if it moves below the lower band it can be oversold.
· Relative Strength Index (RSI)
RSI helps traders to recognize momentum, warning signals, and market conditions for dangerous price fluctuations. The relative strength index is conveyed as a figure between 0 and 100. An asset that lies within level 70 is usually considered overbought. However, if the asset lies near or at level 30 then it’s considered oversold.
An overbought signal is an indication that short term gains could be attaining a maturity point and assets could be ready for a price correction. On the contrary, an oversold signal can be an indication that short term drops are attaining maturity while assets may be up for a recovery.
Traders should avoid using too many trading indicators at once. Choose a few that you are convinced work well for your strategy. Remember, you should uphold your trading strategy even when you use indicators.