III. Volume indicators
i. Indicators are formulas applied to past price data and it gives buy and sell signals to traders.
ii. It is important to use the right indicators for the right purpose.
iii. Types - trend indicators, momentum indicators, volume indicators, and volatility indicators.
Indicators are nothing but mathematical formulas applied to price or volume data. There are different indicators for different purposes. Traders use indicators to get buy and sell signals in the forex market. It is very important that indicators are used in the right way.
What is an indicator?
Indicators are tools that are used by technical traders to assist them in making trading decisions.
These indicators are nothing but certain mathematical formulas that are applied to historical trading data of the currencies, such as price or volume in an attempt to predict how the price might fluctuate in the times to come.
Indicators can be used for short-term trading, medium-term trading as well as long-term trading.
The main principle of an indicator is that it assists the trader in identifying a pattern that has occurred or has been occurring in the past. The trader can then use this information or pattern and look for a buildup of a similar pattern in the coming trading session.
“History tends to repeat itself”, patterns that have occurred in the past will occur at some point in the future, this can give a trader a serious edge in trying to exploit the market inefficiencies and also profit from the same.
Why you should use indicators?
There is a saying that trading is all about buying low and selling high, but the people that say this do not tell us exactly how can we buy low and sell high.
Traders that have just begun their trading journey often struggle to determine where the low is so that they can buy or where the high is so that they can sell.
Indicators are more or less a boon to the trading community. It allows the trader to spot trading opportunities and capitalize on them.
Since indicators are simple tools applied to just the historical price or volume of a currency, they can be used to trade any currency or any asset that is listed on the exchanges.
All that is required is a platform that contains charts that provides historical data and the indicators that are to be applied on the charts.
The trader would then possess a powerful tool that would allow them to pre-determine their entry, exit, and stop loss price levels.
Indicator trading - The right way
Indicator trading has its critique, traders often say that it is not a reliable tool and it does not really assist in trading. Like every tool indicators too come with some conditions.
Application of these tools according to these conditions is essential, or else it defeats the actual purpose of the tool.
The first condition of using indicators for trading is to determine whether the prevailing market condition is suitable for the indicator or not.
Some indicators work well in trending markets while some work well in ranging markets, we cannot use indicators in different market conditions and expect it to work as a holy grail.
Another thing that traders should be aware of is that they must not cluster the entire chart with all types of indicators. Every indicator is developed with a purpose, and the inputs of indicators may vary.
Two indicators of the same type will just increase the confusion for traders whereas indicators of different types when used, will greatly simplify things for traders and assist them in entering trades that have high probabilities of giving them a profit.
Types of indicators
Every indicator isn’t built the same, they may serve different purposes and may have different information inputs that will lead to different results produced.
It is essential to understand the underlying of each indicator before it is applied on charts or else misinterpretations can take place which can further lead to low-quality trades.
I. Trend indicators
i. What is a trend?
A price is said to be in a trend when it moves in one direction with complete conviction.
In trading, trends are spotted by identifying whether the price is making higher highs and higher lows in case the price is in an uptrend, or whether the price is making lower lows and lower highs in case the price is in a downtrend.
ii. What are trend indicators?
Trend indicators are tools that are developed in order to allow the traders to take advantage of the price rallies that take place every now and then.
It helps the traders to spot such rallies right at the beginning of the trend or maybe when the price has already started trending and is in its nascent stage.
iii. Types of trend indicators
MACD - Moving Average Convergence/Divergence.
II. Momentum indicators
i. What is momentum?
The momentum of a price depicts the exact speed, velocity, or conviction with which the price is moving or will move in a direction.
ii. What are momentum indicators?
Momentum indicators are used to identify the strength of a price rally that is taking place or might take place soon. It allows the trader to measure the rate by which the price will move.
These indicators are used to identify strengths or weaknesses on the price movement which can be used to take trade decisions accordingly.
These indicators are also known as oscillating indicators, as the values of these indicators oscillate between two extreme values which indicate overbought and oversold zones.
The manner in which the value of the indicator moves between the two extreme points replicates the movement of the price of the currency. It helps the traders in identifying price reversals that can take place.
iii. Types of momentum indicators
RSI - Relative Strength Index
CCI - Commodity Channel Index
III. Volume indicators
i. What is volume?
In trading, volume indicates the number of transactions that have happened in one particular currency till that point in time.
It depicts the total quantity of the particular currency that has been exchanged between buyers and sellers present in the market.
Traders can access volumes of trading sessions, a trading week, or even of an entire month and so.
ii. What are volume indicators?
The volume Indicators help the trader identify whether the price is moving in tandem with the volume or not.
If the price is in an uptrend or a downtrend and if the volumes also increase or are maintained at a high level, this indicates that there is strength in the move.
Whereas if the price is in an uptrend or a downtrend and if the volumes are decreasing or are very low, this indicates that there isn’t much strength in the prevailing price movement. Volume indicators are very useful for confirming a trend change.
iii. Types of volume indicators
Money Flow Index
Ease of Movement
IV. Volatility indicators
i. What is volatility?
Volatility depicts the stability of the price of a currency. When the price of a currency is moving quickly in either direction, the market condition is said to be volatile.
High volatility means that the currency has a lot of attention and that many traders are trading in the same. Low volatility means that the currency is not being traded by many traders.
ii. What are volatility indicators?
Currencies that have high volatility give the traders more opportunities to trade and to earn a profit, as high volatility means higher price movement in either direction.
In conditions of low volatility, there isn’t much price movement, hence the traders do not get many opportunities to trade. This makes it important for traders to identify whether the prevailing conditions are volatile or not.
This is where the volatility indicators help the traders. Volatility Indicators measure the price movements and indicate to the trader whether the conditions are suitable for trading or not.
iii. Types of volatility indicators
Which indicators do you use?
I hope that after reading this blog post, you know well enough about indicators and the various types of indicators.
Do let me know which indicators you like the most and which ones do you use.
It should be noted that these indicators are not some holy grail that will always be correct in its output and it won’t always bring in profits.
Mastering these indicators requires lots of time and experience, but once done, unlocks lots of potentials.
Share this blog post with others and let them also get introduced to the world of indicator trading.
Feel free to reach out for any questions or queries through the comments section and I will get back to you for sure.