Forex indicators are crucial tools that can be used by all traders in order to improve to become more effective at what they do.
In a previous post, we explored five of the most common types of indicators that even beginner traders should know. In this post, we explore three more.
Bollinger bands, also known as envelopes, were developed in the 1980s by John Bollinger to measure whether prices were high or low in relation to market volatility. Most traders use Bollinger bands to determine whether trend reversals are about to occur based on market volatility.
Bollinger bands are made up of three bands with the middle band being the 20-period simple moving average of the currency pair. The values of the upper and lower bands are derived from the middle band (the upper band is calculated by adding two standard deviations from the middle while the lower band is calculated by subtracting two deviations from the middle).
As a trader, you should stick to using the default values of the Bollinger bands as this is what most traders are using. Remember the price of a currency pair rarely strays far out of the Bollinger bands, which is why they are known as envelopes.
One of the most effective Bollinger bands trading strategies is the snapback to the middle band strategy, which is based on the fact that prices typically snap back to the middle band before heading in a specific direction.
The term MACD indicator is an acronym for Moving Average Convergence Divergence indicator, which is a trend-following indicator used to measure momentum. Most traders use the MACD indicator to identify trend direction and to determine momentum and potential trend reversals.
The MACD indicator consists of the MACD line, the signal line and the MACD histogram. The MACD line and signal line move together although the MACD line is slightly faster than the signal line. As a trader, you can use the MACD indicator to generate trade signals, or to confirm trade signals generated by other trading strategies.
The average directional index (ADX) indicator is used by most traders to identify whether a currency pair is trending or not. The ADX indicator was developed and introduced into the markets by J. Welles Wilder in 1978. The ADX indicator is used by forex traders to measure the strength of a trend, to identify trends and ranges, and as a filter for different trading strategies.
The ADX indicator is made up of the ADX line, the positive directional indicator (+DI) line and the negative directional indicator (-DI) line. The ADX indicator is calibrated from 0 to 100 with values above 25 indicating a strong trend while values below 25 identify ranging markets. You can also use the ADX indicator to confirm trades from other strategies as well as its own trade signals.
Tools like the Bollinger bands, MACD, and ADX can help you become a more effective trader and to make better trading decisions. While it is important to note that no indicator works all the time and to always apply proper risk management, learning about these three indicators is worth any new trader’s time.