Indicators a trader must know

         4 types of indicators 

                 FX traders 

             must know

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Many forex traders spend their time looking for that perfect moment to enter the markets or a telltale sign that screams "buy" or "sell." And while the search can be fascinating, the result is always the same. The truth is, there is no one way to trade the Forex markets. As a result,traders must learn that there are a variety of indicators that can help to determine the best time to buy or sell a forex crossrate

Here are four different market indicators that most successful forex traders rely upon.

Indicator No.1: A Trend-Following Tool

It is possible to make money using a countertrend approach to trading. However, for most traders the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the trends direction. This is where trend-following tools come into play. Many people try to use them as separate trading system; while this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long position or a short position. So let's consider one of the simplest trend-following methods – the moving average crossover.

A simple moving average represents the average closing price over a certain number of days. To elaborate, let's look at two simple examples – one longer term, one shorter term. (For related information on moving averages, see "Exploring the Exponentially WeightedMoving average.")

Figure 1 displays the 50-day/200-day moving average crossover for the euro/yencross. The theory here is that the trend is favorable when the 50-day moving average is above the 200-day average and unfavorable when the 50-day is below the 200-day. As the chart shows, this combination does a good job of identifying the major trend of the market – at least most of the time. However, no matter what moving-average combination you choose to use, there will be whipsaws.

figure 1: The euro/yen with 50-day and 200-day moving averages

Source: Profit

Source

Figure 2 shows a different combination – the 10-day/30-day crossover. The advantage of this combination is that it will react more quickly to changes in price trends than the previous pair. The disadvantage is that it will also be more susceptible to whipsaws than the longer term 50-day/200-day crossover.

Many investors will proclaim a particular combination to be the best, but the reality is, there is no "best" moving average combination. In the end, forex traders will benefit most by deciding what combination (or combinations) fits best with their time frames. From there, the trend – as shown by these indicators – should be used to tell traders if they should trade long or trade short; it should not be relied on to time entries and exits. (For additional information, check out "Forex: Should You Be Trading Trend or Range?")