A lot of time, we hear newbie traders ask of the perfect time to place a buy order to make a profit. While the search for an ideal moment to enter the market is highly fascinating, most times, the result is always the same. Here is the truth; there is no fast and hard rule to make a profit when it comes to forex trading.
For you to make a consistent profit off the forex market, you need to learn the different types of the best metatrader indicators and how they can help you determine the best time to place a buy or sell order. As you may already know, forex indicators come handy if you need to trade the market on auto-pilot without necessarily monitoring market trends by sitting in front of your laptop.
In light of the above, we will be taking a look at the top 4 forex trend indicators every forex trader should know.
Top 4 Forex Trend Indicators on the Market
#1. Trend-Following Indicators
Countertrend approach can fetch you good money if you are a veteran trader; however, the best and easiest method is to determine the direction of market trend and trading in that direction. Trend-following tools are a no-brainer in this regard if you want to understand the direction of market trend.
Even though some traders seem to enjoy using them as a distinct trading system, the truth remains that trend-following tool is designed to help you suggest whether to enter a short-term or long-term trade position. For example, the most straightforward trend-following tool, the moving average (MA) indicator represents an asset closing price over a specific number of days.
Let’s explain further – the chart below was plotted for 50-day/200-day MA indicator for EUR/YEN. From the chart, you will observe that the trend is only favorable when the 200-day MA is below the 50-day MA. Similarly, the trend is unfavorable when the 200-day MA is above the 50-day MA. This combination helps to identify major market trends. However, the only drawback is that there will always be whipsaws irrespective of your moving average combination.
While some traders will assert that a particular combination can give the best result, we want to make it clear here that there is no “best” combination as far as moving average is concerned. The best you can do is to figure a particular combination that works best with your time frames.
#2. Trend-confirmation Indicators
If the trend-following tools above help you to determine whether a currency pair trend is up or down, how reliable is the indicator? Remember, trend-following indicators are susceptible to whipsaw as mentioned above; as such, it is wise to gauge whether a trend-following indicator is right or wrong. That’s where the trend-confirmation tools come in.
A trend-confirmation tool is one of the best forex trend indicators on the market. As with the trend-following tools, the trend-confirmation indicator helps traders to generate buy or sell signals for maximum profit. If the trend-confirmation tool and the trend-following tool agrees and are bullish, it gives traders confidence to take a long-term position. On the other hand, if both of them are bearish, it is best to take a short-term position if your preferred currency pair.
A typical example of a trend-confirmation tool is the popular moving average convergence divergence (MACD). MACD is a technical indicator that works by measuring the difference between 2 MAs and comparing the difference to an MA of its own.
The result of MACD is plotted on the chart below. From the chart, you can observe that an uptrend was confirmed when the moving average is below the current smoothed average. Similarly, a downtrend was confirmed when the moving average is above the current smoothed average.
Another example of a trend-confirmation tool is the rate of change indicator (ROC). The chart shows how to use ROC to determine the trend of a currency pair. Once the blue line is below the red line, the ROC has confirmed an uptrend. On the flip side, when the blue line is above the red, the indicator has confirmed a downtrend.
#3. Overbought/Oversold Indicators
Once you confirm the direction of a currency pair, it is crucial to know when to jump in on a trade or if you should pull back. Put better, once the trend-confirmation indicator confirms a bullish trend, you are left with two choices – either to buy into weakness or to buy into strength. For this, an overbought/oversold indicator comes into the picture.
While there are several overbought/oversold indicators on the market, one handy example is the Relative Strength Index (RSI). RSI helps traders to determine the right price action to enter a trade position. Here is how the indicator works: RSI approaches zero if the price action is going downwards. Similarly, if the price action tends upwards, the indicator approaches 100. If the indicator reads 50, it means the price action is neutral. The chart below shows how to plot RSI on the MT4 trader.
#4. Profit-taking Indicators
A profit-taking indicator is another tool to leverage if you need to make a profit on a trade. There are also several indicators out that fit into this bill. For instance, the RSI indicator we discussed above is also a profit-taking indicator. Whether you are looking to enter a long-term or short-term trade position, the RSI indicator can help you make a continuous profit.
Another great indicator that falls into this category is the Bollinger Band. This indicator helps traders to create trading “bands” so that they are able to determine the right time to enter a trade. The chart below shows how to plot Bollinger Bands when trading EUR/YEN. Here is how this indicator works: once the asset price reaches the upper band, traders holding a long-term position would take profit. On the other hand, traders holding a short-term position would take profit once the asset price reaches the lower band.
Conclusion Of Forex Trend Indicators
If you are still contemplating whether to start a forex trading career and you are waiting for the right entry point, you would definitely sit on the sideline for a long time. Forex trend indicators can help you determine the right currency pair for you to invest your money.
On our website, we have different technical indicators that fall into these 4 types of indicators we have covered in this article. You can check out these indicators and tools through this link to start using them. One thing is sure; these indicators will improve your trading strategies, and ultimately your earnings.