The Republic News News for Everyone | News Aggregator
Trading in forex markets is something that many business-minded investors turn to, not least of all because it aligns with their existing macroeconomic knowledge.
The key point here is that no market exists in isolation because economic events in seemingly disconnected markets can influence any other market; it’s just that the level of interconnectivity and resulting influence may not always be readily apparent.
In the interests of promoting informed decision-making, we’re going to look at forex trading indicators alongside key economic indicators. That way, you can come to a much more rounded judgment as to whether or not it is the right time to open or close a given position.
What are forex trading indicators?
We will begin our guide to forex trading indicators by defining them as a set of practical tools that are used by investors and business owners to make smarter choices regarding the behavior of global markets. They can be viewed as traits of a given forex market, and traits that reveal something deeper about the market dynamics that are at play. While they are signals, they are not concrete guarantees of future behavior.
Once we accept this important caveat, we are ready to take a look at what they can teach business-minded investors.
What business-minded investors can learn from indicators
Indicators are proven ways to support an intelligent, proactive approach to risk management that takes into account timing and is informed by detailed trend evaluation. While intuition and experience are useful things to have at your disposal, a working knowledge of forex indicators can help provide a consistent foundation on which to build more in-depth strategies. By thinking of them as markers and signals of underlying market behavior and associated buyer-seller psychology, you start to see how useful they become.
We also wish to stress that a truly business-minded approach cannot be built solely with forex indicators. These are signals given off by a particular market at a specific time, and though very useful, they do not provide information on the wider economic outlook. What we need to do is find a broader context within which we can better understand the current behavior of the market. We do this by looking at macroeconomic indicators, and we will return to this idea in more detail after the following section.
Important trend & momentum indicators
Getting to grips with the following fundamental indicators will highlight common types of market behavior and what is likely to be driving them at any moment in time:
The moving average (MA) smooths short-term volatility with a view to highlighting long-term price behavior
The exponential moving average (EMA) provides a similar type of chart smoothing, but with more weight given to the most recent prices, making the chart more responsive to new data
The golden cross is when a short-term MA rises above a longer-term MA and provides an indication of a bullish trend where prices may be about to continue upwards
The death cross is when a short-term MA dips below a longer-term MA, and it is a sign of a bearish trend in which downward price pressure can be reasonably expected
The moving average convergence divergence (MACD) is a highly dynamic indicator used to detect sudden changes in momentum. When support and resistance levels are approached, these can signal buy and sell times for investors
The relative strength index (RSI) is a momentum oscillator that monitors the speed of change of price movements on a range from 0-100. Higher values indicate overbought markets in which a price correction may be imminent. Lower values indicate oversold markets where a price rally may be about to take place
The stochastic oscillator is a momentum indicator used to identify overbought and oversold markets across a broader timeframe
Each of these indicators describes a specific market behavior or trait, as well as capturing some of the information that can be used to describe the underlying psychology of the market. It’s important to note that no single indicator can ever provide a comprehensive picture of how a market is behaving, and no amount of indicators will be able to provide predictions with certainty about future market evolution. We need to combine these indicators with macroeconomic indicators to make sure that we make decisions with the benefit of understanding the wider economic context.
Fundamental economic indicators
The following are key metrics that describe the economic pressure points that drive long-term currency movements, regardless of how they are paired for trading:
GDP increases will typically lead to an increase in the value of the respective currency
CPI increases generally result in interest rates rising, which in turn brings in foreign investment and strengthens the associated currency
Low unemployment rates tend to indicate good long-term economic health, leading to increased interest rates and stronger national currencies
Economic forecasts from central banks and annual budget announcements by national governments tend to have a significant impact on currency values. These events are always scheduled well in advance, allowing investors and traders to prepare a range of strategies to deal with any ensuing volatility or uncertainty. Some traders find it helps to use educational resources such as ThinkMarkets to learn more about how they can use forex trading indicators to interpret trends and strengthen their decision-making.
Using indicators to build optimal strategies
Indicators, when used correctly, become key building blocks for optimized strategies because they tell us about the underlying psychology of the market. In a world in which it may feel like there is a never-ending supply of data, news, and information at our fingertips, it’s sifting out the gems that will really make a difference. With this in mind, we need to start thinking about how we can combine indicators so that we don’t become overly reliant on a single metric or class of metrics. An example would be combining a trend-following tool with a momentum oscillator so we can see both the direction and likely future direction of a chart.
The use of multiple indicators doesn’t just provide a richer, broader picture, but one that is more likely to be correct. As we all know only too well, there are no guarantees in economics, but cross-referencing indicators with one another allows us to become more confident in what we believe we are seeing. The introduction of macroeconomic data ensures that we never get unwittingly blindsided by a major news event or budgetary announcement that will have a profound impact on thousands of different markets around the world. Indicators can then be combined with stop-loss orders to limit potential losses in the event of a strong shift against a trading position that has already been adopted.
Final thoughts
Business-minded investors need to look at forex markets as components of a comprehensive macroeconomic outlook on a global scale, as opposed to isolated markets largely shielded from outside activity. Only then will they be able to understand local shifts with the benefit of the global economic context.
In fact, using forex markets as a test case can help sophisticated investors to gradually build out strategies that they can then use in other markets. Doing so can refine understanding of key nuances and help identify subtle differences between seemingly similar market conditions that can quickly lead to a large degree of divergence.
