Types of Technical Indicators in Forex Day Trading

The Three Types of Technical Indicators in Forex Day Trading

The basic categories or types of technical indicators in Forex day trading are three and include the most important tools which are used every day by Forex traders of any level. The knowledge of the characteristics and potentials of each of these types of indicators and the way they can be used in Forex day trading constitute a very important part of the day traders’ education. In this article we will go through every basic group of indicators, the main use and purpose of each one and the most important technical indicators that represent each group.

Momentum Indicators

The momentum indicators are used to analyze and spot how fast the price is moving as well as a possible change in the direction of the price. In Forex day trading this is vital in order to have the best possible timing while you are opening and closing positions in the very volatile currency market. Technical indicators of this type are called oscillators because they indicate a movement of current price that oscillates above or below an average of closing prices of certain periods of time in the past. When price is going in one way and the momentum indicator is starting to head the opposite way, a shift of the price direction is possible. The up and down areas of such indicator are considered the edges and this is where a currency or other financial medium is considered oversold or overbought and is possible the price direction to reverse looking for a correction. Is important to note that the price may stay for a long time in the overbought or oversold area, especially in markets that are trending strongly. The most famous and widely used momentum technical indicators are: Stochastics, Momentum and RSI (Relative Strength Index).

Trend Indicators

The trend indicators are used to define the direction of the price. As price is moving up and down it is critical to successfully estimate the direction trend because this is the most probable way that the price will follow. Also another very important factor that can be gauged using trend indicators is the strength of the trend. Taking this step right we increase in great extent the probabilities of a winning trade. The main way that trend indicators are calculated is making use of past closing prices of certain time frames. A simple example of price direction estimation is using the 200 EMA (exponential moving average). In case the price is above the 200 EMA the market is considered bullish and in case of the price is moving below the 200 EMA the trend is considered bearish. The settings of each indicator and the way of its use vary and it is a matter of preference, experience, trading style and continues experimentation. But the estimation of the trend strength as well as the direction of the price constitute the main reason of using this kind of indicators. The renowned trend technical indicators are: Moving Averages, MACD (Moving Average Convergence-Divergence and ADX (Average Directional Movement Index).

Volatility Indicators

The volatility indicators are used to estimate how fast the price is moving and how big are the moves of the price. In this case the extent of the movement matters and not the direction. The highest and lowest prices that are recorded are defining the range of a price movement in any chart. This is a rule regardless the trading instrument but Forex market is characterized of bigger volatility. There is a debate when we are speaking about trading in very volatile market conditions. Every trader has his own approach. Many Forex day traders consider volatility a good thing and an opportunity to ride the wave and execute fast trades taking profits multiple times during the day. Other traders avoid very volatile markets because they think that the risk is bigger and they become prone to gambling. In any case volatility must be measured and must be taken into consideration when trading any kind of financial instrument. Specific tactics and trading strategies must be applied under specific volatile circumstances. Best technical indicators to gauge volatility are: ATR (Average True Range), Bollinger Bands, Fibonacci Bands, Chaikin Volatility, Standard Deviation and also pure price difference calculation (highs minus lows).

Volume Indicators

The volume indicators in trading are used to evaluate the strength of a trend and also to validate the current direction of the price. The volume indicator are based in different kind and calculations of moving averages as well as actual volume numbers of specific financial instruments. Big volumes of transactions undermine the power of the trends in the market. Many traders avoid using much the technical indicators but they consider a volume indicator one of those of great importance. This is the way to realize the beat of a market in order to decide the right time to open a new trade or close an existing one. Experienced traders are making use of volume indicators and get the right information out of them. Recommended volume technical indicators are: OBV (On Balance Volume), MFI (Money Flow Index) and the Chaikin Money Flow indicator.

Conclusion

So these are the main three types of technical indicators in day trading. There are many tactics, strategies and systems in trading and all of them are based less or more on a combination of technical indicators and fundamental analysis. It is up to every trader what type of technical indicators will use in his Forex day trading strategies and how these indicators will be utilized as part of different trading systems. In day trading accuracy is critical and the best tools that can contribute effectively are the technical indicators. It is highly recommended to read about how to use technical indicators for day trading and the right way to combine them and create successful trading strategies.