If you are a newbie, the chances are that you have been trying to get the best indicators to help in CFD trading. You have been met with a swarm of different trading indicators, and sometimes it can be confusing. In this article, we will be discussing the must-have forex indicators for successful trading. You do not need to use all these indicators; you can choose one that suits your trading method and perfect on it. Not every indicator will work for you; the best advice is to master 1 or 2, having many indicators on your chart is not just confusing, but will slow your decision-making process.
Indicators are necessary is studying market behavior and ultimately making the trading decision. They are crucial in quickly identifying trends. The indicators may utilize historical or current situation in the market in order to predict the market movements.
Simple moving average (SMA)
SMA is arguably one of the most used forex indicator used by many technical traders. Most traders will make use of this indicator to know how the market is trending, in some instances, traders can use it to enter buy and sell positions. When the market is on an uptrend, the SMA will be rising, and when the trend is downwards, the SMA will be falling. SMA can also be used in drawing support and resistant points; in short, the SMA line can serve as a resistance/support level.
SMA is calculated by summing up closing prices for a number of periods and then dividing the same by the periods. The indicator will be critical in smoothing out volatility, making it easier to view the trend of a particular pair. The longer the timeframe you choose for your SMA, the smoother the curve and the shorter the period, the more volatile it will be.
EXPONENTIAL MOVING AVERAGE (EMA) EMA is another widely used indicator in CFD trading; EMA is merely a weighted SMA. The indicator will put more weight to current prices as opposed to SMA that gives equal weights to all Prices. EMA will generally respond quickly to current price changes compared to the simple moving average. The use of weights to come up with EMA makes the indicator more reliable and less affected by the lagging factor.
A Shorter EMA is less likely to lag while a longer EMA has much historical data, which make it lag.
MACD We make use of the moving average convergence and divergence to assess the market momentum. The indicator does not just tell you the direction of a trend; it will also measure the strength of a trend. MACD is an indicator that closely shows the relationship between two moving averages.
MACD is calculated by subtracting the 26 days EMA from the 12-day-EMA. A signal line, which is the 9-day EMA, is then drawn on the MACD to act as trigger sell/buy signal.
When the MACD is below the signal, the market is bearish and therefore, a signal to sell. When the MACD crosses the signal line and is above it, the market is bullish. A divergence from the current price is an indicator that a trend is ending.
Bollinger bands are among the most popular tools available to a technical trader. The indicator has three lines, a line above and another below the CFD or currency price line. These lines will usually show volatility ranges of a particular security. The indicator works by showing the highs and the lows of achieved by the target commodity or currency. The bands will widen and narrow based on the volatility levels; a wideband shows high volatility while a narrow band is an indicator of low volatility. The Bollinger bands indicators will help in confirming the overbought and oversold conditions of an individual market.
In areas of low fluctuations especially around the resistance and support regions, the bands narrow then widens when the market is trending as shown in the image above.
Stochastic Indicators Stochastic indicator is among of the most popular currency, stocks and CFD trading indicators. The indicator helps in measuring trend strength and momentum. It analyses price movements and will inform us how fast and robust price moves. The index is necessary for identifying oversold and overbought conditions in a market. Traders will try to get when a new trend if forming or about to build. Stochastic oscillators come in handy to tell the traders when the market is saturated and about to reverse. The oscillator ranges between 0 and 100, regardless of how slow or fast a security moves; the oscillator fluctuates in that range.
Overbought and oversold moments are characterized by the sluggish momentum that signals a turn of events. Momentum will shift in direction when the full line crosses the dotted line. We always advise that not every crossover translates into a signal, crossovers happening on crucial resistance and support regions can be relied upon.
RSI or relative strength index can also be used to measure the oversold and overbought conditions in a market. Most currency and CFD traders will make use of this indicator to forecast a currency future behavior.
With this in mind, you may be asking yourself, which among these is the best indicator for you. Unfortunately, I have no answer for that. Remember all these are powerful indicators, and one may work for you while another may not. The key thing here is to understand the strengths and weaknesses of each indicator discussed above. You also need to know under what market conditions does your signal work best and under what circumstances does it fail.
It is also worth noting that in trading, you need to keep things as simple as possible. Avoid using too many forex indicators, perfect a few, and you will be good to go. The use of indicators should not be done blindly; you must do your analysis to support the signals you are receiving. An excellent way to do that is by working with signals fired near the support and resistant areas.