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Common Chart Indicators Used In The Forex Market

What is an Indicator? An indicator is a tool that is used by a forex trader to help evaluate the market. Traders use tools to help evaluate risk, confirm market clues and to help make more knowledgeable trading decisions. I am going to discuss common chart indicators used in the forex market that can help make better trade decisions. The common indicators used in forex include MACD, Stochastics, Relative Strength Index, Bollinger Bands, and Parabolic SAR.

MACD

The MACD is primarily used to catch trends early. The MACD can also be used to spot trend reversals. The MACD uses 2 moving averages and a histogram. The moving averages consists of one fast moving average and one slow moving average. The histogram consists if vertical lines that measures the distance between the 2 moving averages. Keep in mind, this is a lagging indicator due to the fact the MACD measures moving averages.

Stochastics

Stochastics are used to identify areas where currency is either oversold or overbought. When the moving average lines of the stochastic reaches over 70, this is usually an indicator the pair is overbought and it is a good time to sell. If the moving average lines of the stochastic reaches a level of 30 or below, this is an indicator the pair is oversold and this may be good time to buy.

Relative Strength Index

Very similar to the Stochastics, RSI or Relative Strength Index, is used to determine possible areas where a currency is either oversold or overbought. RSI measures the speed and change of price movements. RSI is considered overbought when above 70 and oversold when below 30.

Bollinger Bands

Bollinger Bands are primarily used to measure how volatile the market is. The bands acts as mini support and resistance levels. Trading strategies utilizing Bollinger Bands generally involves the squeeze or bounce of the band. Bollinger Bands are usually used in ranging markets to catch breakouts early.

Parabolic SAR

The Parabolic SAR is usually used to spot trend reversals. This is an easy indicator to use because this indicator only gives bullish or bearish signals. If the dots are above the candles, it is a signal to sell. If the dots are below the candles, it is a signal to buy. A good way to use the Parabolic SAR or Parabolic Stop And Reversal is determine when a long rally up or downtrend is over.

Each indicator listed above has both pros and cons of using them. Indicators can be beneficial depending on the type of trader you are and the type of strategy you are using. Which of the following common chart indicators used in the forex market listed above do you use the most?

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