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5 Best Indicators for Trading

Trading chart displayed on the screen of the laptop. Stock market, trend line in a candlestick form. best indicators for trading

Best Indicators for Trading

Understanding the market is critical for maximizing returns. Trading indicators are available for this purpose. They are useful tools that should be utilized in conjunction with a thorough plan to maximize profits.

Technical analysis is used in many fields of financial investment, although it is most often employed in forex trading, CFDs, commodities, cryptocurrencies, and indices. To comprehend price movement, you must first understand basic trade signals and use a trading platform with the best trading indicators integrated into the system.

It’s worthwhile to spend some time learning how each of these crucial indicators works and how you can use them in your market analysis and trading strategies.

Moving Averages

The moving average, often known as the “simple moving average” (SMA), is one of the most widely used technical indicators. Its purpose is to determine the direction of a current price trend without being affected by price spikes that are shorter in duration. The moving average indicator creates a single trend line by combining the price points of a financial instrument over a certain time frame into a single value and then dividing that value by the number of data points.

The data that is used is contingent upon the duration of the MA. For instance, a 200-day moving average (MA) needs data for 200 consecutive days. Studying levels of support and resistance, as well as viewing price movement from the past, is possible when you make use of the MA indicator. It also implies you can determine likely future patterns.

There is a wide variety of moving averages, and some traders employ more than one to verify the signals they receive from their trading systems. Some examples are weighted moving averages, exponential moving averages (which give greater weight to more recent values), and simple moving averages.

The chart below shows an example of buying when the 100-MA crosses above the 200-MA signaling a bullish price action. And sell when the 100-MA crosses below the 200-MA signaling bearish price action.

Moving Average FundYourFX
Moving Averages – FundYourFX

In Summary:

MA signals a bullish or bearish price trend.

  • Determines the trend’s direction.
  • Determines the levels of support and resistance.
  • Based on past prices.

Bollinger Bands

Bollinger Bands are a set of three lines that show volatility, which may be thought of as the range in prices that they have historically traded inside. The width of the band moves both up and down to reflect the recent volatility in the market. If these bands begin to contract (shrink), this is an indication of high fluctuations; on the other hand, if these bands begin to widen, this is an indication that an asset may contain low volatility.

Bollinger bands are primarily utilized as a strategy for predicting long-term price changes, but they can come in handy for identifying instances in which a particular asset is trading outside of its typical range. If the price of an asset keeps moving above the bounds of the band, this might indicate that it has been overbought, and if it keeps moving below the band, this could indicate that it has been oversold.

Traders that deal in stocks, options, futures, or forex may find this to be helpful because it provides information on the price behavior of the item they are trading.

Bollinger Bands FundYourFX
Bollinger Bands – FundYourFX

In Summary:

It tells whether there is a squeeze or breakouts.

  • Generate oversold or overbought signals.
  • Composed of SMA + upper and lower band.

Relative Strength Index

The Relative Strength Index (RSI) is primarily utilized by traders as a tool for determining momentum, market conditions, and warning signs for potentially dangerous price changes. You may use this indicator to locate overbought and oversold areas, levels of support and resistance, as well as potential entry and exit signals.

RSI compares the current price to historical data in order to determine the magnitude and velocity of a market’s price movement.

The Relative Strength Index is represented by a number that can range from 0 to 100. An asset around the level of 70 is frequently thought to be overbought, whereas an asset at or near the level of 30 is commonly considered to be oversold.

A signal of overbuying indicates that short-term increases may be nearing a point of maturity and that assets may be in for a market correction in the near future. An oversold signal, on the other hand, may indicate that short-term decreases are nearing their end and that assets may be in for a rally in the near future.

RSI relative strength index FundYourFX
Relative Strength Index – FundYourFX

In Summary:

70% or above is overbought or overvalued. 30% or below is oversold or undervalued.

  • Calculate using average price gains and losses over time.

MACD

MACD, which stands for Moving Average Convergence/Divergence, is a commonly used technical indicator that gauges the amount of momentum present in the market. This will result in you having two lines on your chart, one for each moving average that you have. If the line that represents the higher value makes a crossing above the line that represents the lower value, this indicates that the market is overbought, and if the line that represents the lower value makes a crossing below the line that represents the higher value, this suggests that the market is oversold. 

It is an indication of a shift in trend when both lines cross each other at the same time. The MACD oscillator is a useful tool that may be used to assist in determining the optimal time to buy or sell assets.

The term ‘convergence’ refers to the process by which two moving averages are approaching one another, whereas the term ‘divergence’ indicates that they are diverging from one another. If moving averages converge, this indicates that momentum is diminishing; on the other hand, if moving averages diverge, this shows that momentum is growing.

MACD Moving Average Convergence/Divergence FundYourFX
MACD – FundYourFX

In Summary:

Over signal line means it’s a buy. Under signal line means it’s a sell

  • Indicates if the price movement in the bullish or bearish direction is growing stronger or weaker.

On-Balance Volume

The On-Balance Volume Indicator, or OBV for short, is a volume-based indicator that calculates the total amount of trading activity that occurs between buyers and sellers. An increase in the number of traders holding long positions causes a rise in the buy OBV, whilst an increase in the number of traders holding short positions causes a rise in the sell OBV.

When compared to the green or red volume histograms that are often shown at the bottom of price charts, the relative activity that occurs between price bars and OBV creates more actionable alerts than those histograms.

Some key things to keep in mind with OBV include the following:

  • When the price and the OBV are both making higher peaks and higher troughs, it is likely that the upward trend will continue.
  • When the price and the OBV are both making lower peaks and lower troughs, it is likely that the downward trend will continue.
  • If the OBV is increasing while the price is trading in a range, this may indicate accumulation, which is a precursor to an upward breakthrough.
  • If the OBV is decreasing while the price is trading in a range, this may indicate accumulation, which is a warning of a downward breakthrough.
  • If the price keeps making higher peaks and the OBV keeps failing to achieve higher peaks, the upward trend is likely to plateau out or collapse altogether. This is referred to as a negative divergence.
  • If the price keeps making lower troughs but the OBV doesn’t, the downward trend is likely to flatten out or fail.  This is referred to as a positive divergence.
OBV On-Balance Volume FundYourFX
On-Balance Volume – FundYourFX

In Summary:

Can predict bullish/bearish outcomes.

  • Uses volume changes to predict price.
  • Shows crowd sentiment.

 

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