Forex Exchange Rates Indicator

Forex Exchange Rates Indicator

When new traders start learning forex they are told to wait for indicators before they open a trade position.  However, many new traders do not completely understand what an indicator is and how it helps them trade better.  It is important that you know what the indicators are and what they do.

What Are Forex Exchange Rates Indicators?

On the forex market indicators are tolls which help to predict any price movements of a currency pair in the future.  The term indicator also relates to the tools used in technical analysis to identify entry and exit points for trading.  There are two types of indicators which are leading and lagging indicators.  Each of the indicators has their own benefits and drawbacks making them ideal for different trading styles.

Lagging Indicators

Lagging indicators use history forex exchange rates to provide point of entry and exit to the trader.  These indicators are often more reliable than leading indicators as they are based on hard facts.  However, the main problem with these indicators is that they lag and often miss the correct entry or exit point.

Some of the common lagging indicators are Bollinger Bands and moving averages.  It is recommended that you incorporate both leading and lagging indicators into your trading strategy.

Leading Indicators

Leading indicators are used by traders when the market is not showing a defined trend.  They are often used to define the extremes of any market conditions and can be helpful in the identification of oversold and overbought conditions.  However, as they are working in times of limited market direction they are said to lead the trader and are not as reliable as lagging indicators.

The main disadvantage of using these indicators is that they contain a number of incorrect signals and fake outs.  These are more pronounced when the market is trending instead of when it is ranging.  This unreliability is why most traders do not use them as their primary technical indicator, but rather use them as a starting point.

Some of the most common leading indicators include the Relativity Strength Index or RSI, Williams Percent Range Indicator, Stochastics and Moving Average Convergence Divergence or MACD.

How to Use Indicators

In order to make money on the forex market you have to know how to use technical indicators.  Leading indicators work best in range market condition while lagging indicators work best in trending market conditions.  Of course, lagging indicators can also be used in range markets, but leading indicators should not be used in trend markets.

Most traders will incorporate one or more technical indicators into their strategy.  One of the most common systems is the use of Bollinger Bands with Stochastic indicators.  This system uses the indicators to determine the oversold and overbought conditions of the market and when trades should be made.  This system works best in a range market instead of a trending one.

It is important that you find indicators that you are comfortable working with.  You should understand the basics behind the technical indicator and how to use it in different market conditions.  You should also learn the limitations of the indicator as some do not work well in all market conditions.


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