Using Popular Forex Indicators
Technical analysis in the foreign exchange market involves monitoring price action to make decisions about when to get into and out of a trade. To help with the process of analyzing Forex charts, traders often use indicators. When using the MetaTrader platform, several indicators can be used by simply inserting them into a chart. Here are some of the most popular FX indicators and how you can use them to trade profitably.
The MACD or Moving Average Convergence/Divergence is an indicator that is used to identify trends taking place in the market. To access this indicator, open a chart on your MetaTrader platform and then select Insert from the top menu. At that point, select Indicators, go to Oscillators, and then click MACD. You will then be shown an options box so that you can enter various parameters. If you do not have any specific settings to change, you can simply click on OK, and the indicator will be placed on your chart with default settings.
Once the MACD indicator is on the chart, you will see two lines moving seemingly at random below the price chart. Each line will be a different color (usually red and blue), and they will sometimes cross over one another. Each one of these lines represents a moving average of different periods. One line represents a period that is shorter than the other. You will also see a histogram with bars of various lengths moving across the chart.
When the faster moving average line crosses over the other, this could be an indication that a trend is starting to form. The faster moving average will pick up on the trend first. If the faster line continues to move further away from the slower line, this tells you that a trend is forming. You can also look at the histogram to determine the strength of the trend. If the bars are larger, this indicates that the trend is powerful. When the faster moving line starts to come back down and crosses over the other line again, this tells you that the trend is reversing.
Another commonly used indicator on the MetaTrader platform is Bollinger Bands. Bollinger Bands are designed to help you gauge the volatility of the market and predict what the price will do next. To get to this indicator, go to Insert->Indicators->Trend->Bollinger Bands.
When you attach the indicator, you will notice two bands that move with the price line on your chart. One band is above the price line, and one band is below the line.
The basic idea behind Bollinger Bands is that when they expand widely, this tells you that the market is volatile and moving. When the lines come close together, it tells you that not much action is taking place in the market.
When trading with this indicator, you may see two different formations which can help you decide which way the market is moving. The first formation is referred to as the Bollinger Bounce. This occurs when the Bollinger Bands are not necessarily close together. The price usually moves towards one of the lines and then bounces back towards the other direction once it touches it or comes close. The bands act as variable support and resistance lines on your price chart.
Another phenomenon occurs when the bands are very close together. When this happens, it can indicate that the price is about to move rapidly in one direction or the other. When you see a tight band formation and then the price breaks through one of the bands, this is usually an indication that the price will continue in that direction.
The Parabolic SAR is another indicator that can come in handy when trading the Forex market. It also happens to be one of the simpler indicators to use. Adding this indicator is simple: Insert->Indicators->Trend->Parabolic SAR. When you use this indicator, you will notice a series of dots above or below the price line on your chart.
When the dots are above the chart, it means that the price is moving downward. If the dots are below the line, it tells you to place a buy trade. This can be a good way to tell when a trend is ending after you are already in a trade. If the dots switch from one side of the line to the other, it means that the trend is ending.
The Parabolic SAR dots can also be a good place to set your stop loss order when trading a
Using the Indicators
All of these indicators and several more are available for free on the MetaTrader platform offered by most Forex brokers. You can try them out on a demo account to see how they work and to gain some familiarity with them. Once you are ready to go live, you can insert them in your chart and use them exactly the same way.