Understanding when to buy or to sell on forex may seem difficult at the beginning. Most traders, who are only starting out, attempt to trust their gut or simply trade randomly — and, of course, lose.
You need indicators that provide “buy” and “sell” signals that you need to follow in order to remain successful in the forex market.
Forex indicators and how they work
Forex is not a single entity — it is a global market with millions of agents acting alongside and against each other. However, most of the time the market has a consensus on its direction based on the news feed. For example, if the UK releases a good economic report, more people get interested in buying GBP, which causes it to grow — and that means that the GBP currency pairs are in a bullish mood.
There are a lot of ways to determine the mood of a currency pair, but most professional traders use three indicators — Moving Averages, MACD and Stochastic Oscillator.
Moving Average represents the average state of the market throughout several previous days. Most traders concentrate on two moving averages — 50 MA (50 days) and 200 MA ( (200 days).
If the moving average begins to ascend, it’s a sure sign that there is more interest in the asset than there used to be. In other words, the market is in a bullish mood and you should buy more of this currency pair.
MACD stands for Moving Average Convergence Divergence. It’s an oscillator-style indicator that combines the reports from the Moving Averages and presents it in a clearer format.
Basically, if the MACD histogram is growing, then so does the interest in the asset it represents. The histogram constantly sends buy/sell signals and is often considered the most reliable indicator.
Stochastic Oscillator introduces a different element into the equation — support and resistance levels. Originally designed for the stock market, Stochastic was adapted for Forex in 1990s.
The indicator consists of two lines — the %K line that represents the state of the market during the last 5 days and the %D line that represents the state of the market during the last 3 days. Since the %D line changes more rapidly, it can be used to determine the current trends.
Where to get forex indicators and signals
MetaTrader 4 and other trading software come with all three indicators preinstalled, but it might be difficult to get your head around them as is. You still should give it a shot, though, since real-time data is a lot more valuable.