Forex indicators are signs in the market that traders look for to tell themselves that it is time to make a trade. They are planned to be looked for in advanced and are used to maintain trading discipline and take as much emotion out of trading as possible. Emotions are good in themselves, but they are usually bad for trading, because markets obey patterns, not whims or chance (in the longer-term).
So, what are some of the proven most highly effective forex trading indicators?
One of the most highly touted is the set of Fibonacci Retracement Levels. These are based on the Fibonacci numbers sequence, a sequence of numbers that was discovered in the Middle Ages and has continued to utterly fascinate mathematicians to this very day. But you don't need to be a mathematician to apply the Fibonacci numbers to trading. All you need to understand is that the Fibonacci numbers describe patterns and cycles that are found in the universe and the natural world, and these also crop up in forex trading, since those patterns are generated by humans who are also part of the universe and the natural world.
Fibonacci retracement levels make use of the observable fact that when prices in the forex market reach certain highs or lows, there is a strong tendency for mass trading behavior to "retrace" them or somewhat correct them. These retracement points can be planned out in advance with a surprising degree of accuracy; forex traders who are using the Fibonacci retracement method buy or sell at these critical times. Otherwise, they just leave their money alone to gain or lose as it will until a Fibonacci retracement ratio is reached. The important Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8%, and 100%. Different traders favor different ones of these.
Another leading forex indicator loved by traders is the RSI (Relative Strength Indicator)
. This is a straightforward forex trading tool. When the RSI hits 80 or above the trader shorts the currency in question. When the RSI hits 20 or lower the trader goes long on the currency. These numerical indices indicate when a currency is being bought too much (80) or, conversely, sold too much (20). All successful traders who make a lot of money are contrarians. They go against the grain.
Now, the forex indicator most often used by institutional traders is the 200 Day Moving Average. This works by observing the highs and lows in a currency's price that have been reached in the last 200 days and averaging them together to come up with a "golden cross", or a point in that currency's price where a trader should consider buying or selling (depending on what price it was acquired at). Each trading day causes one day's worth of chart readings to be replaced by a new day's, so that the chart is constantly being adjusted. Traders love this technique because they feel it enables them to get a good feel for how a currency is being valued over an extended period of time and, thus, see its trading patterns which they can use to minimize their risk in trading it.
There are other forex indicators, too, but these are three of the most-often used ones. They are used so often because they have proven themselves to work. You just want to choose an indicator that flows with your mentality and trading style.
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