And Some Lesser Known, Advanced Indicators
By Your Trading Mentor,
Trading Angel
Forex trading is a challenging activity that requires traders to analyse market trends and make informed trading decisions. One of the tools that traders use to analyse the market is indicators. Indicators are mathematical calculations based on a currency pair’s price and/or volume. When I first started trading forex I was completely obsessed with indicators as I though there was sure to be one which was the holy grail and told me the exact moment to buy and sell! I realised pretty quickly this was ridiculous. These days I’m actually more of a price action girl myself whilst also being really keen on fundamental analysis and macro economics. Having said that, technical indicators still have their place and can be useful tools either to give you a binary set of rule for your trading plan or also to give you some key information which will help you to analyse how the market is moving and there for how it is likely to move in the future
In this blog post, we will discuss the advantages of using indicators in forex trading, I will also compare technical indicators to price action trading.
THE ADVANTAGES OF TECHNICAL INDICATORS
1. Identify Trends
Indicators can help traders identify trends in the market. By analysing past price movements, traders can determine if a currency pair is trending up or down. Trend-following indicators, such as moving averages, can help traders identify the direction of the trend. This can help traders make informed trading decisions and enter/exit trades at the right time.
2. Confirmation of Price Movements
Indicators can confirm price movements in the market. For example, if a currency pair’s price is increasing, but the RSI indicator is showing that it is overbought, traders may consider selling the currency pair. This is because the RSI is indicating that the price is due for a correction. Indicators can help traders confirm whether the price is overbought or oversold and identify potential entry and exit points for trades.
3. Risk Management
Indicators can help traders manage their risk. By using indicators to set stop-loss orders and take-profit levels, traders can limit their losses and maximise their profits. For example, if a trader enters a long position, they may set a stop-loss order at a level below the entry price. This can help minimise losses if the trade goes against them.
4. Objective Analysis
Indicators can provide traders with objective analysis. Unlike emotions, indicators do not change based on a trader’s mood or bias. They provide traders with objective information that can help them make informed trading decisions. This can help traders avoid impulsive decisions based on emotions, which can lead to losses.
5. Scalping and Day Trading
Indicators can be particularly useful for scalping and day trading. These trading strategies involve making multiple trades within a short period. Indicators can help traders identify potential entry and exit points for trades, and confirm the strength of a trend. This can help traders make quick decisions and execute trades efficiently.
Indicators are useful tools for forex traders. They can help identify trends, confirm price movements, manage risk, provide objective analysis, and aid in scalping and day trading. However, it is essential to note that no indicator can guarantee trading success, and traders should use a combination of indicators and other analysis tools to make informed trading decisions.
COMPARING PRICE ACTION TO INDICATORS
Technical indicators and price action analysis are two of the most popular methods used to analyse the market. I will now compare the benefits of technical indicators in forex trading to price action analysis.
Technical Indicators
Technical indicators are mathematical calculations based on a currency pair’s price and/or volume. Traders use these indicators to identify trends, confirm price movements, manage risk, and provide objective analysis. Here are some benefits of using technical indicators:
1. Objective Analysis: Technical indicators provide traders with objective analysis. Unlike emotions, indicators do not change based on a trader’s mood or bias. They provide traders with objective information that can help them make informed trading decisions.
2. Confirmation of Price Movements: Indicators can help traders confirm price movements in the market. For example, if a currency pair’s price is increasing, but the RSI indicator is showing that it is overbought, traders may consider selling the currency pair. This is because the RSI is indicating that the price is due for a correction.
3. Risk Management: Indicators can help traders manage their risk. By using indicators to set stop-loss orders and take-profit levels, traders can limit their losses and maximise their profits.
Price Action Analysis
Price action analysis is a method of analysing the market by studying the movement of price itself, without relying on technical indicators. Here are some benefits of using price action analysis:
1. Simplicity: Price action analysis is a simple method of analysing the market. It involves studying candlestick charts and identifying patterns and trends in the price movement.
2. Flexibility: Price action analysis is a flexible method of analysing the market. Traders can use it on any currency pair and any timeframe.
3. Real-time Analysis: Price action analysis provides traders with real-time analysis of the market. Traders can quickly identify potential entry and exit points for trades based on the current price movement.
Comparison
Both technical indicators and price action analysis have their benefits in forex trading. Technical indicators provide objective analysis, confirmation of price movements, and risk management. Price action analysis, on the other hand, is a simple and flexible method of analysing the market that provides real-time analysis.
Ultimately, the choice between technical indicators and price action analysis depends on the trader’s trading style and preferences. Some traders prefer to use technical indicators to confirm price movements and manage risk, while others prefer to use price action analysis to identify patterns and trends in the price movement. It is important to note that no single method can guarantee trading success, and traders should use a combination of methods and analysis tools to make informed trading decisions.
FOREX TRADING INDICATORS
POPULAR TECHNICAL INDICATORS
Forex trading indicators are tools used by traders to analyse market trends and make informed trading decisions. There are numerous indicators available, and each one serves a specific purpose. Here I will discuss some of the most popular forex trading indicators.
1. Moving averages
Moving averages are one of the most widely used indicators in forex trading. They are used to identify trends and determine the direction of the market. Moving averages come in different forms, such as simple moving averages and exponential moving averages. Traders often use them to identify support and resistance levels, and to determine entry and exit points for trades.
2. Relative strength index (RSI)
The RSI is a momentum indicator that measures the strength of a currency pair’s price action. It oscillates between 0 and 100, with readings above 70 indicating overbought conditions and readings below 30 indicating oversold conditions. Traders use the RSI to determine when to enter or exit a trade, and to confirm the strength of a trend.
3. Bollinger Bands
Bollinger Bands are a volatility indicator that consists of three lines. The middle line is a moving average, and the upper and lower lines are two standard deviations away from the moving average. Traders use Bollinger Bands to identify potential breakouts and trend reversals. When the price of a currency pair moves outside the upper or lower band, it is considered to be a potential trading opportunity.
4. Fibonacci retracements
Fibonacci retracements are a technical analysis tool used to identify levels of support and resistance. They are based on the Fibonacci sequence, which is a mathematical pattern found in nature. Traders use Fibonacci retracements to identify potential entry and exit points for trades, as well as to determine profit targets and stop-loss levels.
5. MACD
The MACD (Moving Average Convergence Divergence) is a trend-following momentum indicator that measures the difference between two moving averages. It consists of a MACD line and a signal line, which are used to identify potential entry and exit points for trades. Traders also use the MACD to confirm the strength of a trend and to identify potential trend reversals.
In conclusion, there are numerous forex trading indicators available, and each one serves a specific purpose. Moving averages, RSI, Bollinger Bands, Fibonacci retracements, and MACD are some of the most popular indicators used by traders. It is important to note that no single indicator can guarantee trading success, and traders should use a combination of indicators and other analysis tools to make informed trading decisions.
PERHAPS SOME LESSER KNOWN TECHNICAL INDICATORS
While most traders use popular indicators like moving averages, MACD, and RSI, there are also several lesser-known advanced indicators that can provide valuable insights into market trends and price movements. In this blog post, we’ll explore some of these lesser-known advanced forex trading indicators.
1. Ichimoku Cloud
The Ichimoku Cloud is a technical analysis indicator that was developed by Japanese journalist Goichi Hosoda in the 1930s. It consists of five lines that provide a comprehensive view of price action, including momentum, trend direction, and support and resistance levels. The five lines are:
– Tenkan-sen: A 9-period moving average of the highest high and lowest low over the past 9 periods.
– Kijun-sen: A 26-period moving average of the highest high and lowest low over the past 26 periods.
– Senkou Span A: The average of Tenkan-sen and Kijun-sen, plotted 26 periods ahead.
– Senkou Span B: A 52-period moving average of the highest high and lowest low over the past 52 periods, plotted 26 periods ahead.
– Chikou Span: The closing price of the current candle, plotted 26 periods behind.
The area between Senkou Span A and Senkou Span B is known as the Ichimoku Cloud or Kumo. The thickness of the cloud indicates the strength of support and resistance levels.
2. Fibonacci retracements
Fibonacci retracements are based on the idea that markets tend to retrace a predictable portion of a move, after which they will continue to move in the original direction. This indicator uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues in the original direction. The key levels are 23.6%, 38.2%, 50%, 61.8%, and 100%.
3. Elliot Wave Theory
Elliot Wave Theory is a complex technical analysis indicator that involves identifying patterns in market movements. It is based on the idea that markets move in waves, with each wave consisting of a series of smaller waves. The theory identifies five waves in the direction of the trend, followed by three corrective waves. Traders use Elliott Wave Theory to identify potential entry and exit points.
4. Volume Profile
Volume Profile is a tool that displays the volume traded at each price level over a specified period. This information can be used to identify areas of support and resistance, as well as potential entry and exit points. Volume Profile can also help traders identify areas of high liquidity, which can be useful when placing orders.
5. Relative Vigor Index (RVI)
The Relative Vigor Index is a momentum indicator that compares the closing price to the trading range over a specified period. It is designed to measure the strength of a trend and to identify potential trend reversals. The RVI is calculated by subtracting the closing price from the opening price and dividing the result by the trading range. The result is plotted on a scale from 0 to 100.
In conclusion, these lesser-known advanced forex trading indicators can provide valuable insights into market trends and price movements. However, traders should be cautious when using these indicators, as they can also generate false signals. It is important to thoroughly research each indicator and to test it before incorporating it into a trading strategy.
If you’re wondering what my favourite indicator is, at the moment I would say it is the Smart Money Concepts Indicator on TradingView. If you don’t already have a TradingView account it is my favourite place to do my technical analysis, you can sign up and trial the pro version for free for a month using this link. Just don’t forget to cancel before the month is up if you don’t want to go ahead with your subscription
Until next time, Happy Trading,
Love From Your Trading Mentor,
Trading Angel x