# Most Important Forex Indicator All Forex Trader Should Know

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Most Important Forex Indicator All Forex Trader Should Know

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Trading on the Forex market is not easy. Despite this, a number of traders are still able to consistently make profitable returns. Part of the reason for this is that they successfully use Forex trading indicators. The existence of the 'best Forex indicators' implies that the Forex market is not a random walk, as some economic theories contend. The flaws of the human psyche mean that markets do not always behave rationally. A Simple Moving Average (SMA) is the average price for a specific time period. Here, average refers to arithmetic mean. For example, the 20-day moving average is the average (mean) of the closing prices during the previous 20 days.

Why use the SMA?

The purpose of the SMA is to smooth out price movements in order to better identify the trend. Note that the SMA is a lagging indicator, it incorporates prices from the past and provides a signal after the trend begins. The longer the time period of the SMA, the greater the smoothing, and the slower the reaction to changes in the market. This is why the SMA is not the best Forex indicator for receiving advanced warning of a move. Exponential Moving Average While similar to the simple moving average, this Forex trading indicator focuses on more recent prices. This means that the Exponential Moving Average (EMA) will respond quicker to price changes. Typical values for long-term averages might be 50-day and 200-day EMAs. 12-day and 26-day EMAs are popular for short-term averages.

A very simple system using a dual moving average is to trade each time the two moving averages cross. You then buy when the the shorter moving average (MA) crosses above the slower MA, and you sell when the shorter MA crosses below the slower MA.With this system you will always have a position, either long or short for the currency pair being traded.Moving Average Convergence/Divergence (MACD) is a Forex indicator designed to gauge momentum. Not only does it identify a trend, it also attempts to measure the strength of the trend. In terms of giving you a feeling for the strength behind the move, it is perhaps the best indicator for Forex. Calculating the divergence between a faster EMA and a slower EMA is a key concept behind the indicator. The indicator plots two lines on the price chart.The MACD line is typically calculated by subtracting the 26-day EMA from the 12-day EMA, and then a 9-day EMA of the MACD is plotted as a signal line. When the MACD line crosses below the signal line, it is a sell signal. When it crosses above the signal line, it is a buy signal. You can set all three parameters (26, 12 and 9) as you wish. As with moving averages, experimentation will help you to find the optimal settings that work for you. A Bollinger band is a volatility channel invented by financial analyst John Bollinger, more than 30 years ago. It is still among the best indicators for Forex trading out of the various volatility channel methods available for Forex traders. Fibonacci retrenchment indicator is based on the idea that after an extreme move, a market will have an increased chance of retracing by certain key proportions. Those proportions come from the Fibonacci sequence. This is a sequence of numbers known since antiquity, but were popularised by the Italian mathematician known as Fibonacci. The modern sequence begins with 0 and 1. Any subsequent number is the sum of the preceding two numbers in the sequence.

For example: the sequence begins – 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233…

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