Technical indicators continue to be one of the most popular and effective elements of technical analysis.
Many Forex traders use these tools to help them identify trading opportunities and place trades. However, the usefulness of technical indicators in the field of Forex trading doesn’t stop there!
Many FX traders have found technical indicators to be invaluable when it comes to managing their positions. So, read on to discover the best technical indicators and how to use them!
One of the big challenges that any new FX traders face is how to let winning positions run.
I’m sure you are aware of the age-old market adage “cut losers short and let winners run.” But, in practice, this can be difficult to do. Many Forex traders struggle to identify the conditions in which to hold onto a trade.
And, if they do hold onto a trade, it can be hard to know where to exit. Many traders, unfortunately, end up giving back gains as the market reverses.
Moving averages are a great tool to help Forex traders decide when to cut trades. On a very simple level, they act as a pivot in the market where price is bullish above and bearish below.
So, if an FX trader is short, they can look to keep their position open until price moves back above the MA. Similarly, if a trader is long, they can look to keep their position open until price trades back under the MA.
In the image above you can see that using the MA method would have allowed the Forex trader to maintain their short position right throughout the length of the down-trend before exiting their trade as the market moved above the MA.
The Relative Strength Index is another incredibly useful tool when it comes to managing open positions.
The RSI essentially measures the strength of price moves and alerts Forex traders as to when a swing in price is overbought (and vulnerable to a reversal lower) or oversold (and vulnerable to a reversal higher).
As such, the tool can be very helpful in warning traders of potential reversals. So for example, if an FX trader has a long position on and the market is moving higher, they can monitor the RSI indicator.
When it moves into overbought territory, they know the market is vulnerable to a reversal lower and can either look to move their stops up to lock in gains, take partial profits or even close their trade out.
In the image above you can see an example of how to use the RSI in this manner.
If the FX trader entered a short position on the break of support, they could monitor the RSI indicator until it becomes overbought. At that point, they can either exit the position, move stops down to lock in profits on any reversal, or partially close out the trade and hold a remaining piece.
The Parabolic Stop and Reverse indicator is a mighty tool when it comes to trade management.
The clue is in the name. Essentially, this Forex indicator highlights points in the market through which price would have to reverse to signal a shift in momentum.
So, when the dots are moving above price, this means the market is bearish, and price would need to move above the dots to signal a trend change. Similarly, when the dots are below price, this means the market is bullish and price would need to move below them to signal a trend change.
This can be incredibly useful for FX traders as the dots essentially tell us when a trend change is likely to happen, allowing us to decide how to manage our trade.
In the image above you can see a great example of how useful this tool can be. So, if the Forex trader had been short from the break of support, they could have kept their trade open until the dots changed position.
Exiting at that point would have yielded a great profit and means the trader would have avoided giving back all of their profits as the market reversed.
So, hopefully, by now you have a better understanding of how useful technical indicators can be in managing open positions. You’re now also hopefully aware of all the different possibilities and applications offered by some of these Forex indicators.
Now it’s time to try them out for yourself and see which one you think works best!