Trading the forex markets requires an understanding of the fundamentals and the use of technical indicators that will help you determine the appropriate time to enter a trade. It’s important to match your trading personality to the type of forex indicator that you decide to use. If you are the kind of forex trader that likes to trade breakouts, then you probably want to you a forex indicator that depicts momentum. If you are contrarian type of trader than you will likely want to use a forex indicator that shows you when a currency pair is either overbought or oversold.
One of the most widely used forex indicators that measures momentum is the moving average convergence divergence indicator, which is also known as the MACD. The MACD measures momentum in the forex market by measuring the accelerating in momentum by subtracting a long term moving average from a short term moving average. This difference, known as the spread, is compared to a moving average of the spread.
The MACD can be used on any time period, including daily, weekly, monthly and quarterly periods as well as intra-day periods. The default calculation for the MACD is the 12-period moving average minus the 26-period moving average and comparing that spread to the 9-period moving average of the spread. Many traders like to use a shorter term MACD. Another popular structure for the MACD is the 5-period moving average minus the 13-period moving average and subtracting that from the 6-period moving average of the spread.
When the spread crosses above the 9-period moving average of the spread, a buy signal is generated and upward momentum in a currency pair is generated. When the spread crosses below the 9-period moving average of the spread, a sell signal is generated. A trader can use the MACD as a forex indicator that tells him/her when to either buy or sell a currency pair when momentum begins to accelerate. If you are the type of forex trader that likely to buy (or sell) into momentum, this forex indicator is a match for you.
Alternatively, you could find a forex indicator that helps you determine when the market has stretch too far and it’s time to look for a reversal. The relative strength index (RSI) is a forex indicator that can best be described as a momentum oscillator. The RSI evaluates the movements of a currency pair over a specific period of time and then generates an index reading of 1 to 10.
The RSI calculates how quickly a currency pair has moved and produces a reading as a forex indicator that tells you whether the currency pair is either overbought over oversold. Reading above 70 on the RSI are considered overbought and could reverse lower. Reading below 30 are considered oversold and could rebound. The benefits of the RSI as a forex indicator is it tells contrarian traders when the market as moved too far too fast.
By picking a forex indicator that fits your trading style you can fine tune your entry and exit levels and produce timely forex trades.