If you’re reading this, you’re probably curious about the world of trading. Perhaps you want to enter it. However, you’re still not sure what market to get into, how to find out, and how to get into it when you find out. We’re here to help you with it.
We’re going to talk about the world of forex trading, explain why trend trading is the best tactic, and why you need to learn about the proven forex indicators in order to be successful at it. Let’s take it from the top and explain…
The Basics of the Forex Market
Forex – also known as the foreign exchange market – is the largest trading market in the world. With the increased penetration of high-speed Internet, retail clients from all over have started trading forex online, via different trading platforms.
Of course, forex has been around for far longer than the Internet. In the beginning, the market only accepted institutional clients. As the market progressed, it opened its door to retail clients. Today, thanks to the World Wide Web, trillions of dollars are traded on the forex market daily.
Retail clients on the forex market account for roughly 5% of the total volume. Although this doesn’t sound like a lot, it actually is. That percentage amounts to roughly $250 billion in a daily turnover on the global forex market. How is the market so large?
That’s because multinational trade organizations, traditional financial institutions, and lots of other businesses require foreign currencies in order to function properly. Buying and selling currencies create a constant flow of funds these companies need to operate.
Now, we should discuss how you can cash in on all of this…
What Exactly is Trend Trading
There are many ways to trend foreign currencies. Too many to count really. But today, we’re going to talk about trend trading. As the name suggests, trend traders look for market trends to identify and trade on. On the surface, trend trading is rather simple:
- The trader needs to identify a market trend while it’s happening
- They also need to identify when the trend started and when it’s going to end
Some traders are better at identifying trends while they’re going on, while others are better at finding out when a trend is starting/ending. This ability mainly relies on the indicators you’re using to analyze the market and calculate your next move.
What Are the Best Forex Indicators
Unlike day traders, trend traders need to focus more on certain aspects of trading. That’s why trend traders want to use forex indicators that suit their needs more specifically. Of course, each trader’s trading style is different, so the selection of indicators depends on personal factors.
Nonetheless, the best forex indicators are considered best for a reason. Here are a couple of indicators you might want to start with…
The simplest, most widely used, and oftentimes, the most practical indicators are Moving Averages. Moving Average smooths over the market, which allows you to see what’s trending. Complicated indicators are based on sophisticated moving averages. That’s why having a basic understanding of the Moving Averages could be useful for any kind of forex trading.
Next, we have possibly the most popular forex trading indicator out there, the Moving Average Convergence Divergence. It can be used by many different traders, and trend traders are no exception. MACD helps traders identify when a new trend is being created and shows them when a trend is about to be finished.
Parabolic SAR gets a lot of attention because of its sophistication and helpfulness in identifying trend reversals. That’s actually what Parabolic SAR is designed for, even though many forex traders fail to understand it. It gives traders signals for when they can hop on a certain trend and grab some points in the process. Since it shows risks, it can also be used to stop losses.
Lastly, we need to talk about the Average Directional Index, also known as ADX. Traders use this indicator to see when the price of a certain currency is trending strongly. It can also be used to quantify the strength of a certain trend. The calculations of ADX are based on the Moving Average of price range expansion over a certain period of time.
How can you use these indicators to come up with a winning, trading strategy? Well…
How to Build a Trend Trading Strategy
Building a trend trading strategy requires you to use multiple forex indicators, experiment with them, and finally, combine them to come up with something that will suit your trading style. Which ones should you pick? It all depends really.
For instance, many trend traders prefer to use ADX in combination with price action or moving averages. You can try this as well, however, you should try other combinations too. As you’re developing your trading strategy, you’ll be able to add more elements along the way.
However, you should avoid combining too many different forex indicators. This will only lead you down a path of endless considerations, options, and calculations. If you get too deep into analysis, you’ll only end up hesitating too much and wasting your trading opportunity.
Come up with a strategy that begins with the long-term and then breaks down decision-making into small fragments.
In Conclusion: Always Have a Backup Plan
Keep in mind: forex is still a relatively new discipline.
It has been around for a couple of decades at this point, however, compared to other trading disciplines, it’s still in its infancy. While some indicators have been developed for forex specifically, others were made for trading different assets like bonds, stocks, and commodities.
That means, they’ll perform differently in the forex market than originally designed.
The piece of advice we’ll leave you with is this: make sure to always have a backup plan. While these were the best indicators for trend traders, none of them are perfect. Combine and use them carefully to make the most out of the forex market.