F
orex indicators are an important tool for analysis in the work of the trader, which is indispensable in forecasting price fluctuations.
Experienced traders use a large number of indicators to obtain more accurate data on market entry.
The Forex technical indicator helps to correctly predict the behaviour of the prices of currencies or other trading instruments for a certain period of time.
Let’s review what we learnt in our previous lessons.
There are two types of technical indicators based on the timing of the signals they provide – leading and lagging.
A leading indicator will give you information BEFORE the new trend or reversal occurs, so you can make money by predicting where prices will go next.
The second type is the lagging indicator. It usually confirms the trend. These type of indicators send confirmation signals AFTER the actual occurrence of the event.
Leading Indicators
Oscillators (leading indicators), which show deviations in the price from its average value and give a signal for entry based on the conditions of overbought and resale of the instrument.
They are used when the market is stationary, and also determine the moment of reversal of the trend.
Their advantage is that they can show you the potential reversal before it happens.
The disadvantage is that the leading indicators tend to give many false signals.
If you want to avoid such fake-outs, you should use the oscillators in a combination with other tools.
Common leading indicators are the Stochastic, the Relative Strength Index (RSI), Williams %R, and the Momentum indicator.
Lagging Indicators
As we said, a lagging indicator usually confirms the trend. They send confirmation signals AFTER the actual occurrence of the event.
This is their biggest disadvantage. So you could be a little late for opening a position and miss a big part of the price move.
These trading indicators give us a signal to confirm that the trend in the chart is in full swing.
Lagging indicators are used usually when prices move in relatively long trends.
Keep in mind that they won’t indicate any upcoming changes, but they will tell you what is happening now in the market if you want to act on it.
On the bright side, the lagging indicators have a stronger immune system against false signals.
Commonly used lagging indicators are Moving Averages (Simple, Exponential, Weighted), Parabolic SAR, and the Moving Average Convergence Divergence (MACD).
If you ask yourself when to use oscillators or trend-following indicators, or both, there will be no correct answer or a golden rule.
First, you need to determine the type of market you are trading in and after that you will decide which indicators will give you the right signals.
After you gain some experience, it will become easier for you to identify which instrument you need to use in different market situations.
That’s why we prepare our next section where you will learn how to recognise the forex market environment you are trading in.
