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Forex Indicators: Comparison, Strategy and Explanation

Forex Indicators: Comparison, Strategy and Explanation

A forex indicator strategy provides objective trading signals and can be implemented manually or automatically. Forex indicators can be used to pursue very different strategic approaches. The performance of strategies is measured using a few key figures. 

The quintessence of all forex indicators is a value derived from the price, which continues to form its own line over a longer period of time and can be graphically displayed with a chart program. 

Modern chart programs contain at least a few dozen, often even several hundred forex indicators. An indicator has certain properties that are considered to be significant in terms of future market developments.

1. The Moving Averages

Indicators can be roughly divided into trend-following indicators and oscillators. The simplest conceivable (trend following) indicator is a simple moving average with n periods. To calculate it, the last n period-end prices (sometimes or, if the appropriate parameter settings are used, middle, high or low prices) are added and divided by n. In this form, moving averages are smoothed trend lines, but offer a major advantage in comparison with them: they can be integrated into trading systems.

Conclusion: In principle, Forex indicators can be divided into trend-following indicators and oscillators. One of the simplest trend-following indicators is the simple moving average with n periods, which can be easily integrated into trading systems with its smoothed trend lines.

2. The MACD Strategy

The best-known trend-following indicator is the MACD, which consists of three exponentially weighted moving averages. In the case of weighted averages, younger prices flow more into the indicator calculation than older prices. That makes the average more sensitive to market movements. 

The MACD appears on the chart in the form of two lines. In the standard settings of most chart programs, the MACD line is the difference between a 12-period and a 26-period average. If the line rises, the distance between the two averages increases. 

The second line is (again based on the standard settings) a 9-period average (also exponentially weighted) of the MACD line. The signal line is therefore less sensitive to market movements than the MACD line. If the MACD line crosses the signal line from bottom to top, there is a long signal. In contrast, if the MACD line falls below the signal line from above, a short signal is present. 

At first glance, the construction of the MACD, which is unnecessarily complicated, is a response to a fundamental conflict of objectives with (especially trend-following) indicators. A trend-following indicator can be constructed depending on the selected input period and the weighting either “sluggish” or “sensitive”. A “sluggish” indicator only provides a trading signal when an established one At first glance, the construction of the MACD, which is unnecessarily complicated, is a response to a fundamental conflict of objectives with (especially trend-following) indicators. 

A trend-following indicator can be constructed depending on the selected input period and the weighting either “sluggish” or “sensitive”. A “sluggish” indicator only provides a trading signal when an established one At first glance, the construction of the MACD, which is unnecessarily complicated, is a response to a fundamental conflict of objectives with (especially trend-following) indicators. 

A trend-following indicator can be constructed depending on the selected input period and the weighting either “sluggish” or “sensitive”. A “sluggish” indicator only provides a trading signal when an established oneTrend is already well advanced – the hit rate is then relatively high (because established trends break less often). 

A “sensitive” indicator delivers signals much earlier, but a larger number ultimately proves to be a “false alarm”. Generally, trend-following indicators deliver good results in trend markets, but weak results in trendless phases. Therefore, the indicators are rarely used without an additional filter.

Conclusion: The forex indicator “MACD” consists of three exponentially weighted moving averages and appears in the chart in the form of two different colored lines. The function of this Forex indicator is quite simple: If the MACD line crosses the signal line from bottom to top, there is a long signal – if it crosses it from top to bottom, the trader should go short accordingly. 

Nevertheless, a trend-following indicator such as the MACD is mostly used in conjunction with confirmation indicators, since trend-following indicators do not always provide exact results.

MACD Strategy 

3. Oscillators in Comparison

The second important type of indicator is oscillators. Oscillators provide information about overbought and oversold market situations. Oscillators are based on the inner strength of a trend, which is also known as momentum. 

The basic problem is to put the strength of a trend in relation to the momentum properties of the trend. If this does not succeed, oscillators display overbought and oversold situations at a very early stage of trends . 

One of the best known oscillators is the RSI developed by Welles Wilder(Relative Strength Index, not to be confused with the relative strength comparing different markets). 

The RSI is defined as the ratio of a market’s gains and losses on a closing price basis for a certain period (14 days are standard in the default settings). 

The RSI is scaled so that it can only assume values ​​between 0 and 100. If the value is over 70, the market is considered overbought, if it is below 30, the market is considered oversold.

Conclusion: In addition to the moving averages, oscillators are also among the most important Forex indicators of traders: Oscillators, which also include the Relative Strenght Index (RSI), provide valuable information on oversold and overbought market situations, of which primarily traders with trend reversal Strategy can benefit.

4. Top 5 Forex Indicators at Glance

In order to be able to explain the benefits of various Forex indicators in detail, we will briefly present the five most popular Forex indicators among traders and briefly explain their function.

1. Bollinger Bands

With the Bollinger Bands, traders determine the current market volatility. When market volatility is low, the bands narrow, with increasing volatility they expand accordingly – in addition, the outer edges of the Bollinger bands can also be used as support and resistance lines.

2. MACD

We have already explained the function of the MACD extensively, but this forex indicator is also one of the most popular indicators among traders. They can use it to recognize trends and trend reversals at an early stage and to react accordingly in Forex trading as soon as one of the MAs crosses over the other.

3. Parabolic SAR

The Parabolic SAR strategy (SAR = Stop and Reversal) is primarily based on points that appear above or below the current price. With the help of these points, traders determine a trend reversal and a stop loss. The SAR works best in trend markets.

4. Stochastic

Of course, the stochastic in our forex indicator comparison should not be missing: The stochastic shows the trader whether the price of a financial product is currently oversold or overbought by dividing the chart into three areas. If the price falls below the 20 mark, the trader should buy – if it rises above the 80 mark, this is a sell signal.

5. RSI

We have already discussed the Relative Strenght Index: The RSI also shows overbought and oversold market situations, similar to the Stochastic, but the RSI can also be used as a trend confirmation. If the price moves above the 50 mark, there is an upward trend, with a price below the 50 mark there is a downward trend. 

The five most popular Forex indicators are of course the MACD and the RSI, which we mentioned earlier, but traders are also convinced by the Stochastic, the Parabolic SAR and the Bollinger Bands . Each of these Forex indicators can contribute to a better overview in different market situations and help to develop promising trading strategies.

Conclusion

Good forex indicators are almost indispensable for successful currency trading – and that is why traders have a particularly extensive range of different indicators at their disposal: Indicators such as the Bollinger Bands, MACD, Parabolic SAR, Stochastic or RSI can be grouped into the “trend-following indicators” group. and “oscillators” are classified and thus contribute to a particularly successful Forex trading – provided you know how to use it.

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