Technical indicators and signals are popular tools which can help you when trading forex.
Technical indicators are mathematical calculations that use historic price action and volume to forecast future price movements, providing trade entry and exit signals. These signals suggest a potential time and price for a trader to enter a trade, in order to profit from the predicted move in price. Technical indicators are usually displayed over or below price charts to help traders identify trends and overbought or oversold situations.
Understanding when to open or close a trade is key to successful forex trading and a crucial part of learning how to trade currency pairs. Professional traders have years of experience technically analysing chart patterns (known as technical analysis) or scrutinising current events and news announcements (known as fundamental analysis) to help them assess when to open or close a forex position. Technical analysts will look for signals which guide them on when to enter and exit trades.
A forex signal is a service which suggests possible trades on currency pairs, often for a fee. For traders with less experience a signal provider can offer a service whereby they recommend which currency pair to trade, the price at which to enter the market as well as the point which to execute the trade. Signal providers usually use the technical analysis of an experienced trading professional or use software to automatically seek out chart patterns.
Some traders rely on trading robots or Expert Advisors (EAs) for their forex signals. An EA is simply a set of rules or an algorithm that places trades when a specific set of criteria are met. EAs can be created by anyone with enough technical knowledge and are often sold online.
Generally the source of forex signals fall into one of two camps:
Technical analysis is the most popular source for forex signals, and is based on spotting technical indicators that can appear in candlestick charts. Technical analysis involves assessing historical price action, a complicated form of technical analysis focusing on previous prices and historical support and resistance levels.
Fundamental analysis is suitable for longer-term investments based on the underlying economic health of countries, through regular announcements such as inflation data, manufacturing output and unemployment figures. Arguably the month’s key release is the US non-farm payrolls, which is normally reported on the first Friday of every month. It gives the total number of paid US employees, excluding farm, general government, not-for-profit and private household workers.
Using technical indicators with charts is a fundamental part of technical analysis. Usually plotted as a chart pattern, indicators are placed over chart data to try and predict the price direction and market trend. Technical indicators are of most use to shorter-term forex traders, as they are less concerned with underlying trends or fundamentals such as exports, jobs, GDP or consumer price indices.
Forex indicators are designed to describe short-term price trends and are useful for finding the right currency pair, price level and time to enter or exit a trade. Common technical indicators include:
- Moving average
- Bollinger Bands®
- MACD (Moving Average Convergence Divergence)
- Stochastic indicator
- RSI (Relative Strength Index)
Having a good understanding of these technical indicators is useful for effective technical analysis and signal identification.
While there are a number of services available to forex traders for providing signals, there are few, if any, shortcuts. Learning about forex trading will help you identify trading signals as well as build your own understanding of technical forex indicators and fundamental analysis.
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