Technical indicators play an important role in most trading strategies. There are numerous indicators available that all have the potential to make your trades more profitable. However, selecting an indicator that matches your trading strategy is vital to the process.
Below we take a look at six of the best trading indicators you can use to trade like a pro.
1. Moving Averages
Moving averages are a price trend indicator used to determine the direction of a current price trend without the influence of shorter-term price spikes.
The MA indicator creates a single trend line by combining price points of a financial instrument over a defined time frame and dividing them by the number of data points. The data utilized is determined by the MA's length.
How Do MAs Work?
The bigger the lag, the longer the MA's time. This means that a 20-day MA’s lag would be lower than a 200-day MA. Investors and traders pay close attention to the 50-day and 200-day MAs for stocks – since they are key trading indications.
Technical analysts commonly use moving averages to determine whether an asset is experiencing a shift in momentum, such as a rapid downward price. They may also utilize moving averages to corroborate their assumptions that a shift is taking place.
2. Volume Weighted Average Price
With the volume and price, the VWAP indicator reflects the average price an asset has traded at in a day. It is displayed as a single line on the intraday chart. Traders tend to use VWAP to identify bullish trends where you buy assets at a lower price and sell them later to earn profits.
How Do VWAPs Work?
Using intraday data, the VWAP indicator begins calculating with markets opening and concludes when the markets close. A bullish market will have the price below the VWAP line, whereas a bearish market will show the price above the VWAP line, displaying a downward trend. You can read more about the VWAP indicator on Liteforex.
3. Exponential Moving Average
EMA focuses more on data points more weight than the MA, making data more responsive to fresh information. EMAs can assist traders in validating big market changes and assess their validity when combined with other indicators.
How EMAs Work?
The most utilized exponential moving averages for short-term averages are the 12-day and 26-day EMAs. The 50-day and 200-day EMAs are used as long-term trend indicators. EMAs are used with other indicators to confirm and assess important market changes.
4. Stochastic Oscillator
A stochastic oscillator is a momentum and trend strength indicator that compares a given closing price of an asset to a range of its values across time. It utilizes a 0 to 100 scale. A number below 20 indicates an oversold market, while a rating above 80 indicates an overbought market. However, if there is a strong trend, a correction or rebound is not always certain.
How Stochastic Oscillators Work?
On the chart, this indicator consists of two lines:
- The oscillator's real value for every session
- Three-day MA
Since the price in a Forex market is assumed to follow momentum, crossing the lines is taken as an indication that a reversal is imminent, as it shows a significant movement in momentum.
5. Bollinger Band Indicator
A Bollinger band is a price range indicator that shows where an asset's price generally trades. The breadth of the band widens and narrows in response to recent volatility.
How Do Bollinger Bands Work?
Bollinger bands are used mostly to anticipate long-term price fluctuations and effectively recognize when an asset is trading outside of its normal range. The lower the perceived volatility of the financial item, the closer the bands are to each other - or the ‘narrower' they are. The broader the bands, the more volatile the market appears to be.
6. Relative Strength Index
The RSI is primarily used to assist traders in determining momentum, market conditions, and warning signs for potentially harmful price fluctuations. The RSI is a number that ranges from 0 to 100. An asset around the 70 level is frequently seen as overbought, while one at or around 30 is frequently regarded as oversold.
How Do RSIs Work?
According to an overbought signal, short-term gains may be nearing a point of maturity, and assets may be due for a market correction. On the other hand, an oversold signal might indicate that short-term dips are coming to an end and assets are poised for a rally.
Conclusion
The first guideline of using trading indicators is never to use one indicator alone or employ too many indicators simultaneously. Another thing to remember is never to lose sight of your trading strategy. When utilizing indicators, your usual trading rules should always be followed.
Source: Business Diary Philippines
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