People interested in forex trading often feel overwhelmed by its complexity. As Greg Secker explains, once you learn the basics, especially fundamental forex indicators and how to effectively manage risk, I am confident that with a little determination you can see healthy profits trading in the forex market. I’m not saying that forex trading is simple; it will require you to invest some time learning the ins and outs. Having said that, I can assure you that forex trading is not brain surgery, either, and it does not take years to figure out. If you are new to forex trading, a few basics will have you feeling more confident and ready to get going.
Some economists have suggested that forex trading is entirely unpredictable, that those who are successful are merely lucky. By this logic, successful poker players are also just getting lucky, yet the same players appear over and over at the final table of the World Series of Poker in Las Vegas. In truth, there are several reliable indicators that forex traders use to help them decide what to buy, when to buy it and when to let it go. Though not an exhaustive list, some of the most common and user friendly indicators used by forex traders are the Simple Moving Average (SMA), the Exponential Moving Average (EMA), the Stochastic Oscillator, Bollinger Bands and economic calendars.
Simple Moving Average
The simple moving average is the mean value of a currency or stock over a specified time period. There are short and long SMAs. Shorter SMAs usually run anywhere from 10 to 20 days, and long SMAs anywhere from 50 to 100 days. These numbers, especially when used in conjunction, are designed to reveal market trends and help you determine the likely value of a commodity (in this case, a currency, in the future. When long-term averages overlap short-term ones, it is likely that the value of the currency is going to increase. Conversely, if the short-term average stays in front of the long term average, there is a good chance that the value of the currency is going to drop.
Exponential Moving Average
The exponential moving average is a lot like the SMA, but it is shorter geared, so to speak. While the SMA is designed to analyze relatively long-term averages, the EMA reacts quickly to sudden price changes. Basically, some forex traders like to use the EMA to take advantage of sudden fluctuations in the market.
Dr. George Lane, a securities trader and technical analyst, developed the stochastic oscillator in the late 1950s, and it is still in use today. The stochastic oscillator, put simply, is a measurement of momentum; these measurements, when interpreted properly, can indicate to forex traders the likely future behavior of a currency. The stochastic oscillator measures support and resistance. Although there is a bit more to it, for the purpose of this article, support and resistance can be broadly explained: Simply put, support indicates to forex traders that even though a currency may be dropping, it is unlikely to fall below a certain level and more likely to bounce back positively. Conversely, resistance is a measurement that calculates the exact opposite: Resistance levels refer to a currency’s tendency to actually find support as its value decreases. Both of these indicators help forex traders predict future trends and trade accordingly.
Bollinger Bands, named after John Bollinger of the CFA Institute, surfaced in the 1980s and are used to measure volatility. Volatility is a financial industry term and is calculated using standard deviations from the mean and logarithms. Simply put, it measures whether a commodity is high or low relatively. For users, this takes the shape of a centerline, which is the EMA, and two price channels above and below it, which are the aforementioned standard deviations. With a bit of practice, anyone can learn to utilize the Bollinger Band and make smarter trading decisions.
Economic calendars are some of the best indicators for forex traders, especially new ones. Economic calendars mar certain financial events, such as large companies making financial policy changes, mergers, and other events that have a good chance of impacting the market. Because these events are announced ahead of time, traders can make educated guesses about how specific events will influence the market.
About Greg Secker
Greg Secker attended the University of Nottingham in 1997, where he studied agricultural and food sciences. It didn’t take him long to realize that, although the field was interesting, his heart simply wasn’t in it. Before and while attending the University of Nottingham, he was working for Thomas Cook Financial Services as a trading technologist. Secker was lucky; hismy position afforded him the opportunity to create the Virtual Trading Desk, an internet-based forex trading platform, for which he was awarded the British Telecom Award.
In 2003, he left Thomas Cook Financial Services so that he could trade forex full-time. Only months after leaving, he was able to found Learn to Trade. Greg gained financial freedom through forex trading, and he’s passionate about helping others do the same. At Learn to Trade, we believe that everyone is entitled to participate in the free market, not just a select few. His team works every day to help people just like you understand and interpret forex indicators, effectively manage risk and start making profitable trades quickly!