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Forex chartists use price charts to identify apparent market trends. But mere identification is not enough. They need to know how strong and lasting the trends are. This is done with the help of indicators.

Moving Averages

Being one of the most widely used indicators, these lines laid out on charts average out short term fluctuations enabling one to observe long term trends.

Simple moving averages average all price points over the whole period, like a normal average. Weighted moving averages also smoothen out the price curve, but emphasise on recent price changes more than past ones. The third type are exponential moving averages and are different from the other two in that they multiply a certain percentage of the latest price with previous averages to obtain the average curve.

It can take some time to find what combination of moving average and period length works best for the currency pair you’re targeting. Once you find the right combo, you will be able to trace patterns easier, and hence keep track of your trades accordingly.

Stochastics

These are studies that indicate trend sustainability and price reversals. %K and % D are the two types used in stochastics, measured on scale of 0 to 100; %D is a slow, long term indicator while %K is the faster more responsive indicator. These studies serve no useful purpose in a choppy sideways market.

Relative Strength Index (RSI)

The RSI also measures price movements on a 0 to 100 scale. It is advisable to confirm RSI signals with other indicators. RSI will vary according to the time frame used. Short term RSI fluctuates more and is suitable for day traders while long-term position traders will benefit more using a longer time frame.

Moving Average Convergence Divergence (MACD)

Mac-dee charts the differences between exponential moving averages (26 day and 12 day). A 9 day moving average is used as the trigger line, which when crossed by MACD gives a bullish or bearish signal (going higher than or lower than the trigger line respectively).

There are other indicators like Bollinger bands and Fibonacci retracements which are also used, but the above mentioned indicators are the most commonly used ones.

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