Proceeds from FX trading or trading
currency pairs serve as passive income for many households across the globe
While amateur traders might get baffled by the movement of the market and the best decision they must take while a trade is underway, it is equally bewildering for veterans, given the complexity of the nature of FX trading. So, you cannot conclude that a trader that has been operating in the FX market for several years will win a fortune and the one that has just started off will lose his investment, it could be vice versa too! Remember, the FX market behaves “irrationally” at times and you have to be prepared to face these upheavals.
However, there’s a solution to such disappointments and for this you must make use of certain indicators, also referred to as Forexindicators. While there are many, the most important ones have been discussed in this write-up. So, let us delve deeper into it.
Characteristics of best forex indicators
The Fx indicators that work best are the ones that will attempt to identify the trend and guide you to take the right step forward. Also, they are also “feature-rich”, thereby enhancing your chances of performing better.
Simple Moving Average
Also, referred to as SMA, is the (arithmetic mean) average price for a given period of time. For instance, the average mean closing costs for the last 20 days is the 20 day moving average. The main objective of using average is to even out the price movements so that the trend can be studied and identified. For shorter time period it can range between 10 and 20 days and for longer time period, it can range between 50 days and 200 days.
Being a
“lagging” indicator, it takes into account prices from the past and sets up a
trend in accordance. If you set this indicator for a longer period of time,
smoothing out effect is pronounced and the response to the changing markets is
slower too. If you want to study a trend in the market, this is perhaps the
best FX tool.
The Bollinger Band
A volatility channel is regarded to be another good forex indicator to identify a trend. It implies that if the movement of the price is beyond a moving average coupled with an additional amount, it is quite likely that a trend might set in. The Bollinger Band, named after its inventor, John Bollinger, a financial analyst by profession introduced this more than 35 years ago. It is regarded as one of the best forex trade indicators. Basically, there are 2 aspects (parameters) that Bollinger Band takes into account, namely,
· The number of standard deviations you prefer to place the band away from the moving average
· Number of days you consider for moving average
Most commonly selected standard deviations include 2 or 2.5. In terms of finance, standard deviation is a measure of the volatility prevailing in the market. So, in a nut shell, the Bollinger Band is capable of adjusting to the volatility existing in the market.
The band widens as volatility increases and when volatility decreases, the band narrows down. For a long term observation, the moving average in case of Bollinger Band can be taken as 350 day moving average.
Aside from the above two, forex indicators, there are many others that you can check out and make use of trading currency pairs and observing the trends, the vital ones being Fibonacci Retracement, and Exponential moving average to name just a few.