There’s a vast array of trading indicators available to help you make your trades, and it can be difficult to make sense of these in a general sense. Today, let’s look at four of the most common types: trend, volume, momentum and volatility.
Examples: Simple Moving Average, MACD, Parabolic SAR, etc.
Trend indicators demonstrate the direction of the currency you’re trading in, whether that is bullish (upwards), bearish (downwards) or sideways. A trend indicator can range from a Simple Moving Average, which uses a moving mean to provide prices, or a parabolic SAR, which assumes that prices will generally follow a parabolic curve and uses these to identify optimal entry and exit points.
Examples: Force Index, Ease of Movement, Money Flow Index, etc.
Volume indicators demonstrate the number of trades that are occurring for a currency pair, and these indicate whether interest in a certain direction is strong or weak. High volume might indicate the beginning of a trend while low volume can indicate uncertainty or an upcoming change in stock direction, so traders can respond appropriately. Volume indicators are often used to confirm assumptions from other indicator types.
Examples: Stochastics, RSI, CCI, etc.
Momentum indicators can also be useful in identifying the start of new trends as well as any overbought or oversold situations. These oscillating indicators measure the speed at which a currency pair may be moving, or the strength of a trend. If the market is varied it may have low momentum and high volatility.
Examples: Bollinger Bands, Envelopes, Average true range, etc.
Volatility is a key element of Forex trading, and volatility indicators demonstrate how fast a currency value moves up and down in relation to its mean value. High volatility indicates that price is fluctuating rapidly, for example. The level of volatility is also used as a reference of risk and uncertainty on the market: for example, at the end of a trend you may see volatility pick up as momentum starts to drop off.
You might use a combination of these types and more to obtain a more in-depth awareness of what’s happening on the market. Bollinger Bands, for example, show both trend and volatility data. What’s important is that you get to know all of the trading tools at your disposal and get a feel for what works best.