Traders use forex indicators to analyse the market movement and predict its future direction. The Forex markets operate 24 hours a day, five days a week, with each session opening and closing at slightly different times across countries. Many forex traders tend to use technical analysis, which involves examining price charts to identify patterns that indicate what may happen next.
The most popular indicators used in Pakistan
Let’s look at some of the most popular indicators used in Pakistan today.
Moving Averages are one of the most well-known forex trading tools. They are plotted on top of price charts to help traders identify the current trend, which direction it may be headed, and when a potential reversal occurs.
There are three types of moving averages: simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA). These averages are based on past prices, but they measure different things. The SMA is based on summing up past closing prices over periods at either endpoints or equally spaced apart within the chart window. EMA has weights applied to emphasise recent price data and has a much faster reaction time when prices change. WMA helps eliminate the effect of false breakouts by smoothing out the data it uses before making an average.
Moving averages can be used to create indicator signals such as crossovers, centerline crossovers, and divergences. Crossovers occur when a shorter-term moving average crosses over a longer-term moving average, which is often used as an early indication that trend direction may be about to shift. Centerline crossovers happen when the shorter-term MA moves above/below the longer-term MA and indicates trend continuation. Divergences also point towards potential reversals in trends and show that the momentum does not support the trend direction.
Divergences often signal a change in prices. This usually happens when there is a difference between an oscillator and price action. There are two types of divergences: positive divergence and negative divergence. Positive divergence occurs when an indicator makes higher highs while prices fail to reach new highs or make lower lows even though the oscillator has reached new lows. This might be interpreted as market participants seeing value in buying at current levels to go long but no one is willing to sell. A negative divergence occurs when an indicator reaches new highs while prices fail to reach their previous highs or make lower lows while the indicator makes lower lows. This could indicate that market participants are unwilling to sell at these levels due to a lack of buyers or have already sold out their positions.
Crossovers can also occur between different periods, but this is usually less reliable as it can be easy for traders to manipulate price action to create crossovers without any real buying/selling pressure. In general, using multiple timeframes from across different currency pairs will offer higher accuracy when determining trend direction and the current trend’s strength. Professional traders typically use daily, weekly, hourly, 4-hourly and 30 -minute charts to get the most comprehensive overview of price action.
The Relative Strength Index
The Relative Strength Index (RSI) offers a reliable overbought/ oversold indicator and is one of the most popular indicators used among traders because it combines price action with momentum. The RSI compares the magnitude and strength of recent gains and losses. If a currency pair has been rising for several periods or making higher highs and lows, this will show up as an RSI above 70, indicating strong bullish momentum. Below 30 indicates strong bearish momentum.
Many strategies and indicators are available to traders and investors interested in the forex market. New investors should use a reputable forex broker pakistan like Saxo Bank before starting their investment journey. Trade on a demo account and practise different trading strategies before investing real money.