Entering the forex market by opening a trading account is only the beginning. Yes, you can start making trades and use existing systems or strategies to make money, but nothing beats understanding the market. You can grow your portfolio and maintain a more sustainable trading experience in the long run when you know how to analyze the market.
Fundamental analysis is important, but you cannot negate the fact that technical analysis can help you understand the market better. Through the use of technical indicators, you can understand where the market is going, how it is reacting to fundamentals, and the kind of trades you need to make in order to adapt to those insights.
So, which technical indicators should you use to fully understand the market? There is no definite rule to follow in this department. Every trader tends to rely on different indicators to analyze the market. There are, however, some technical indicators that are known to be very effective, and we are going to review them in this article.
Moving Average is the most popular technical indicator of them all. It is an indicator that virtually every trader uses to see the bigger picture while focusing on market prices. Moving Average, or MA, simply measures the prices of a forex pair across a predefined time period. A 200 MA, for example, usually represents the average price of the forex pair over 200 days.
When trading, you can use multiple MAs to indicate different things. Combining MAs of different time periods is useful for when you want to specifically measure market trends. The single Moving Average line can also be useful for identifying support and resistance points.
Earlier last year, EURUSD’s rally was stopped when it hit the 200 MA. This wasn’t the first time a strong rally stopped when it reached a certain price represented by the pair’s Moving Average. At the same time, you can measure resistance when the current price is above the longer Moving Average indicators. The simplicity of MA makes this indicator incredibly popular among traders.
Relative Strength Index, or RSI
Relative Strength Index, or RSI, is the next indicator on our list. Similar to Moving Average, RSI is also incredibly simple to use. It is basically an oscillator that depicts the general market trends and movement. It oscillates from one side of the equation to the other based on how the market moves. When the RSI hits a certain point – or breaks a barrier – you can expect a reversal or a correction.
Spend some time observing how RSI represents real market trends and you will immediately understand how easy it is to use this technical indicator. Even on a reversal, you will see the RSI oscillator going down to its lowest point, even when the market is relatively sideways.
Since RSI is very useful when combined with other technical indicators, it is one of the most sought-after indicators on the market. If you are comparing brokers you will need to read reviews. You can find a review of top names such as IC Markets here: https://investingoal.com/. You will notice that many of them list RSI as a must-have technical indicator.
Moving Average Convergence Divergence, or MACD
The Moving Average Convergence Divergence, or MACD in short, is an even more interesting oscillator than RSI, despite being less popular. A lot of traders – especially beginners – find MACD to be too complex to set up and use, when in fact it is incredibly intuitive and useful.
MACD adds another layer to market trend: momentum. It is a fantastic indicator for measuring how strongly the market is leaning towards a particular trend. It uses additional metrics like trading volume and multiple time periods to show you crossovers and potential milestones in the market.
Similar to the previous indicators, MACD is best used in conjunction with other indicators. You can combine MACD with indicators that represent support and resistance of a forex pair to develop a trading strategy based on market trends. The combination allows you to make the right decisions based on momentum and the support/resistance points that the market needs to break.
As mentioned before, there are actually a lot of indicators that you can use to analyze the market. For example, stochastics is particularly effective in identifying pairs that are overbought or oversold, giving you a chance to enter (or exit) the market at the right times.
These indicators work even better when used alongside other indicators. You can combine technical analysis with fundamental analysis for a better market understanding too. As you try different indicators and you work towards finding the ones that work for you, you are actually in the process of developing your own trading strategy. The more you refine that strategy, the more (consistently) profitable you’ll be in the market. Considering how volatile the market is right now, you may be looking at complete financial freedom from trading alone.