The technical analysis field is filled with strategies that tell you where to buy and well to sell to make a profit in the Forex market. The conventional wisdom is saying that indicators are helping traders in making the right trading decision. This is true to some extent, but it should be viewed as only a general rule and not a rule of thumb. While using indicators helps one being on the right side of things, it should be known that trading is not a straight line and there are other things that influence the market as well. When it comes to technical analysis, traders can use either technical indicators or technical trading strategies. Technical indicators are the ones preferred by retail traders, as most of this people are looking to profit from the quick swings the market makes. To be more exact, they are scalpers (take many positions daily for short-term oriented profits). These traders are using technical indicators as the supreme tool for their decision-making process.
What Are Trend Indicators
Any Forex trading platform is offering a bunch of technical indicators, from simple to complex ones. They are generally being split into two categories: trend indicators and oscillators. Trend indicators are following the trend, and, most of the times, they are based on averages calculated from previous prices. They reflect the current trend and have multiple uses in Forex trading. One important characteristic of trend indicators is that they are being applied on the actual prices, on the chart, and this makes them extremely visible. In other words, if you’re using a trend indicator for your trading decision-making process, it is impossible to miss when the trend starts if you are disciplined.
Where to be Found
The MetaTrader has some trend indicators offered with the default settings, and the path to reaching them is easy. Just go on the Insert tab, chose the Indicators tab, and from that list select the Trend ones. The ones that appear are the ones listed as default, but it doesn’t mean that these are all the trend indicators that one can find on MetaTrader. Custom indicators can be imported in the trading platform if they exist on the main computer.
Other trading platforms like the JForex or cTrader have them categorized a bit different, but the idea is the same: these are indicators that are applied to the actual prices on a chart. This is a big difference when compared with oscillators.
The Most Important Trend Indicators
In this part of our project, we will just mention the most important trend indicators, as later will have a specific article dedicated to how exactly traders are using them. Also, we’re going to list their advantages and disadvantages, as well as ranking them based on their importance and popularity. As it can be seen on the chart above, under the Trend tab, there is a list of seven trend indicators. Before discussing them, it should be mentioned that this is not a rank. They are not listed based on their importance or something else. There is no order there whatsoever. The most popular one that one is the Moving Average indicator. Every trader in this world knows what a Moving Average indicator is doing and what are the implications when these averages are reached. There are multiple ways to trade with a moving average, and, depending on the settings, there are new concepts interpreted. Such concepts will make the object of different articles here on the Trading Academy project. Next in line is the Bollinger Band indicator. This indicator is named by the one that invented it, John Bollinger. It is formed out of three lines (in some cases only two) and the price stays confined between the upper and lower lines most of the times. The formula is quite a complex one but is based still on historical prices. Depending on the number of candles the indicator takes into consideration, the resulting channel is changing. Beware that this is not a regular channel, but one that adapts to currency prices as well. The Ichimoku Kinko Hyo is quite an indicator. Some trading platforms like the MetaTrader here is listing it as being a trend indicator, but other platforms refer to it as being an oscillator. In both cases, the setups are the same and the interpretation the same. This indicator is a complicated one, in the sense that it has multiple averages on the screen, a cloud, and the interpretation is a confusing one. Nevertheless, it is a powerful tool to track trends and comes from the Japanese technical analysis branch. Trend watchers are always aware where the Ichimoku cloud is and what the implications for future prices are.
How to Trade with Trend Indicators
There are different ways to trade with these indicators. Some of them have even the potential to spot reversals, like the Ichimoku cloud, for example. The typical approach is to try to use them for entering/re-entering in a trend that already started. It is a saying that “the trend is your friend” and this saying should be known by all traders. Indeed, this is true, and the general trading should be in the direction of a trend. If the trend is on a bigger time frame, like on the daily chart and more, then the bigger the time frame, the longer the trend will last. Traders that caught the move from the start will want to add to their position, but not at all costs: they want to find a dip to buy (in a bullish trend) or a spike to sell (in a bearish trend). For doing that, trend indicators are being used. On the other hand, traders that missed the start of the trend, want to join the party as well. They’re not going to enter at any place, but they’ll look to join the trend on any pullback (in a bullish trend) or spike higher (in a bearish trend). The two situations reflect the definition of a trend indicator and this is how they are being used. Not all trend indicators are applied on the actual prices, as, for example, the ADMI (Average Directional Movement Index) is not. However, the way the lines are interpreted shows the start or end of a trend, and therefore the indicator is categorized as a trend one. This is all that matters: its interpretation. Moving forward, the next article will deal with what oscillators are, and why they are even more popular than trend indicators. From this moment on, our project will become more and more interesting as technical factors will lead to impressive setup to profit from the Forex market swings.
Recommended Further Readings
- Forex Trading – Explaining the Concept
– What is forex trading, generalities about trading the currency market.
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow
- What is a Forex Broker and Types of Brokerage houses
– Explaining what a Forex broker is and does, how the business should be organized, and how many types of Forex brokers exist.
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Forex Trading – Explaining the Concept
Other Educational Materials
- “Predicting currency crises:: The indicators approach and an alternative.” Berg, Andrew, and Catherine Pattillo. Journal of international Money and Finance 18, no. 4 (1999): 561-586.
- Are currency crises predictable? Goldfajn, I. and Valdés, R.O., 1998. . European Economic Review, 42(3), pp.873-885.