There are a variety of indicators and analysis methods to aid you in your decisions about particular currency pairs when you do foreign exchange trading. There are four particular indicators that many traders make use of to determine the movement in the foreign exchange rate.
Trend Following Tools
Most traders trade with the trend, however, you do find those who go against the trend. Regardless of the method you choose, it is wise to know the trend and what direction it is going. This is when you should use trend following tools as they can be suitable indicators for your entry point, but they can also indicate where you should be looking. One of the more common tools used to follow trends is the moving average.
This tool will indicate to you the average closing points of a trade over a few days. It is indicated as a solid line which runs along with the trend of a currency pair’s price. Traders generally make use of two individual moving averages on one chart to show them the indicators prevalent in the market at that particular time.
Confirmation of the Foreign Exchange Rate Trend
Once the identification of a trend has taken place, there is the need to confirm that it exists. You may think that this is an unnecessary step, but you should rather be safe than make a loss. To do this, you need to use confirmation tools. These tools should be used in combination with the trend following tool to provide you with information regarding the most suitable trend to trade. A popular trend confirmation tool that you could make use of is the MACD histogram. It not only lets you know that there is a trend present, it confirms it and gives you an indication as to the strength of that particular trend. The most suitable method for you to use would be a combination of the moving average along with the MACD.
Oversold and Overbought
Trends end when they have been overbought and oversold. You should have access to tools that aid you in identifying when these points have been reached. The three day RSI is a common tool that you can use for this purpose. It calculated the total of the increase and decrease days in a specified period of time. It then provides you with a value between the ranges of zero to 100. If it indicates a level close to 100, the price is on the downside. Neutral readings are considered to be around 50.
One of the most important aspects when you undertake foreign exchange trading is to know your profitable exit point. You have the option of using a tool to enable you to do this profitably. You need to choose the most suitable tool for this purpose and you must ensure that it fits in with your trading style. Bollinger bands are the tools most commonly used to determine exit points at a profit. Bollinger bands indicate a certain point in a trend when it is most profitable for you to exit your trade. For long positions, the point of exit will be when the price has almost reached the upper band. Similarly, for short positions, the indicator will be at a point when the prices are closest to the band at the bottom.
You should be aware of appropriate indicators for you to determine the best times to trade.