There are a lot of traders who look at technical analysis to determine what the market is going to do. When you use technical analysis you are going to be using technical indicators. It is important that you know about the different foreign currency exchange indicators that you can use. Some of these foreign currency exchange indicators are going to be more common than others.
Indicators for Trend Following on the Foreign Currency Exchange
You can become profitable by using a counter-trend approach. Most traders find it easier to trade in the direction of the trend. The role of trend following tools is not to be used as an independent trading system. It is to be used as a suggestion tool for entering either a long or short position.
The Moving Average
This is one of the simpler trend following tools. A moving average is representative of the average closing price for a number of days. If you look at a 50 day/200 day average for a currency pair, the theory stands that it would be a favourable trend when the 50-day is shown at a level above the 200-day. It will be unfavourable if the 50-day is under the 200-day. This trend combination is ideal for identifying major movements in the market. Bear in mind that you will always experience whipsaws, regardless of the moving average combination chosen.
The 10 day/30 day crossover is advantageous as its reaction is quicker to price changes than the 50 day/200 day. The disadvantage of this crossover is that it is more prone to whipsaws.
You will benefit most by making a decision as to the combination which best suits your time frames. From there you will be able to use these indicators to show if you should trade short or long. You should not depend on it to tell you when to enter or exit your trades.
Trend Confirmation Indicators
A trend following tool indicates whether the main trend is up or down. Many ask if this is reliable or not. To make a decision as to whether it is accurate or not, you can use a trend confirmation tool. This tool can at times be used to indicate buy and sell points, but this is not the intention. You need a tool that confirms what you are following.
The essence of these tools is that if both are bullish, you can be confident in considering a long trade in your currency pair. If they are both bearish, you can focus on selling your pair short.
The Moving Average Convergence Divergence
This is one of the most useful and popular trend confirmation tools used. It firstly measures the variance between two moving averages. This variance is smoothed, followed by a comparison to its own moving average. When the smoothed average rises over its own average it is positive and an uptrend can be confirmed. The same applies for the reverse situation where the current average is below the moving average, it will be negative and confirmation of a downtrend is apparent.
These indicators are best indicated on graphs and you should ensure that you know what the indicators are trying to tell you.