Forex Trading: The Basic Indicators to Trade (Part 1)
Once we have chosen the trading platform with which we are going to work our daily Forex trading, it is essential to know exactly the indicators that we are going to use in our analysis of the market to make buying or selling decisions.
Indicators are merely a graphical representation of different market behaviors that help us understand what is happening at any given time to have a more accurate reading of the reality of price action. However, they are nothing more than that: help. Taking them as the representation of absolute truth is one of the frequent mistakes in trading.
It is quite usual for people in the early stages of trading to test infinite indicators in search of the definitive, that unequivocally gives us signals of whether to buy and sell. In case you are in that phase and you have not yet arrived by yourself to the obvious conclusion, let me say it clearly: that magical and definitive indicator does not exist.
Forget trying to understand the indicators as generators of signals of purchase and sale, and begin to treat them as a support for your reading of what happens in the market. Then, little by little, you will see how you are discarding completely useless indicators until you are left with only a few that really add up in your daily trading.
Among all the endless indicators that may come to exist, I will try to give some basic brushstrokes of the main ones, among which without a doubt, we must start with the well-known moving averages.
They are the technical indicator par excellence, and its main feature is to smooth the price action to establish trends in a much clearer way in generally volatile environments. They are extraordinary to follow trends, and may even come to be glimpsed when they start or come to an end.
They are a delayed indicator when calculated according to the different prices in the past, and short, medium or long term periods can be established for their calculation. The lower the calculation period of a moving average, the more energetic and charged their movements will be, reacting much faster. To give a greater weight to the most recent closing prices over time, in addition to the simple moving average, there are the exponential and weighted averages as well.
It is common practice to work with different means, fast and slow, on the same chart, paying special attention to the crosses between both as signs of possible changes in trend. If the fast average (usually between 5 and 20 days) crosses over the slow (between 10 and 50 days), the situation can be understood as bullish; If the cross is down, the situation is considered bearish.
It is important to keep in mind that the use of moving averages in environments where the market is sideways (that is, not having a marked tendency) is not at all desirable. Happy Trading.