It's a truism that following trends provides the much-needed edge to any forex trading plan or strategy. Hence the popular saying goes, "The trend is your friend". Investors study particular trends and take their positions based on the dominant trend while disregarding any trades that contradict it. However, there is no single indicator that can guarantee you cent per cent success in your trades. Currency trading often involves other important aspects such as risk management and your trading disposition & style as well. Having said that, there are a few useful and widely-practised indicators employed by most traders to identify trading opportunities. At best indicators should be used as reference and to postulate all your trades based on a signal from one indicator may prove to be detrimental to your trades. Thus, you cannot depend on them as the ultimate trading approach. Let's now discuss some of the time-tested and popularly trending forex indicators that can be beneficial in extending your winning streak.
Moving Averages :
The moving average is a plotted line that reckons the average price of a currency pair over a time frame. The moving average that a trader decides to use depends on the time frame in which he or she trades. Usually the 200-day,100-day and 50-day simple moving averages are widely used. When the market is on an uptrend you can use the moving average or multiple moving averages to recognise the trend and the apt time to buy or sell. The moving average can be used in several ways. If one is to look at the angle of the moving average and the movement is towards a horizontal direction then the price is said to be ranging not trending. If it is an upward angle then an uptrend is underway.
Crossovers are another means of utilizing moving averages. By plotting both a 200-day as well as a 50-day, you get a buy signal when the 50-day surpasses the 200-day. Conversely, you get a sell signal when the 50-day drops below the 200-day. The time frames can be altered as per your individual requirements. When the price exceeds above a moving average it's a buy signal and the reverse is true for a sell signal. Moving averages are widely used to identify trends and find areas of support & resistance. They are considered a lagging indicator as they are based on past prices. On the flipside, since market rates are more dynamic than the moving average it often tends to give incorrect signals too.
MACD (Moving Average Convergence Divergence) :
The MACD is a technical analysis indicator that oscillates above and below zero and follows both trends as well as momentum. An elementary MACD technique is to see on which side of zero the MACD lines are on. If it's above zero for a prolonged period of time then it signals an uptrend whereas if it crosses below zero for a longer time frame then it's a downtrend. Signal line crossovers provide supplementary buy and sell signals. A MACD consists of two lines- a fast line and a slow line. A buy signal is generated when the fast line crosses through and above the slow line. In case of a sell signal the fast line crosses through and below the slow line.
RSI (Relative Strength Index) :
Relative Strength Index is an effective indicator that lets us see the overbought or oversold levels of a stock. It is another oscillator but here the fluctuation is between zero and 100 and so it provides some different information than the MACD. When the indicator is above 70, the price is viewed as overbought and due for a correction and if the indicator reaches below 30 then the price is viewed as oversold and due for a bounce. While ordinary overbought and oversold levels can be precise for trend-following investors they may not provide timely signals most of the time.
An option is to buy near oversold conditions in an uptrend and take short trades near overbought conditions in case of a downtrend. Trendlines or a moving average can help interpret the trend direction and in which way to take trend signals. Erroneous signals to buy or sell can be formed when stocks have sharp spikes in price and as in the case of other technical indicators one should not rely solely on RSI to execute their trading strategy.
On Balance Volume (OBV) :
Volume by itself is an invaluable indicator and OBV takes a huge chunk of volume information and collates it into a single one-line indicator. It computes the cumulative buying/selling pressure by adding volume on gainful days and deducting volume on losing days. In theory, volume should corroborate trends. Rising prices should be accompanied by rising OBV and shrinking prices with a falling OBV. If OBV is rising but price isn't, the latter is likely to follow suit and start increasing. Again, if price is going up but the OBV is flat-lining or plummeting then the former maybe near the top. In another situation if the price is lowering and the OBV is flat-lining or rising then the price may be nearing the bottom.
Indicators are extremely helpful in decoding price information and signalling trends as well as forewarning you of market reversals. They are suitable for all time frames and each indicator can be applied in more ways than specified. It's best to combine indicator strategies, research more on them and test them out before applying them in a live trading environment so that you can find out what works best for you and is ideal for your trading style. Good luck with your trading!