Successful forex traders know how to use market indicators that reveal the best time to buy or sell a forex cross rate. Here are four of the most popular.
The first one is a trend-following tool, which suggests whether to enter a long or short position. Essentially, trend-following tools help traders recognize major trends, and then profit by trading in those trends’ directions.
1. Moving average (MA)
One method is the moving average crossover. If the price of a stock climbs above its 20-day moving average, it could be a signal to buy.
2. Moving average convergence divergence (MAC-D)
The second is a trend-confirmation tool. If it concurs with the trend-following tool, a bullish sign tells a trader to take a long position in the currency pair in question; a bearish sign means find an opportunity to sell short. The moving average convergence divergence, or MAC-D, is a popular trend confirmation tool.
3. Relative Strength Index (RSI).
The third indicator is an overbought/oversold tool. Traders must decide whether to jump in as soon as a clear trend is established, or to wait until after a pullback occurs so they can minimize risk. The three-day relative strength index can help traders make the decision.
The RSI calculates the total sum of up days and down days over a time period, providing a value that ranges from zero to 100. An asset is deemed overbought once its RSI level nears 70, and undervalued if it nears 30.
4. Bollinger Bands and a trailing stop.
And the fourth indicator is a profit-taking tool. An RSI that rises to 80 or more is an indication that it’s time to take profits. Other good indicators are Bollinger Bands and a trailing stop.