What are the most popular indicators for CFD trading?
When opening a trading platform for the first time, one is usually surprised by the variety of technical indicators available. For example, the popular trading software MetaTrader has more than 30 indicators available by default. The use of such indicators is part of the technical analysis. In addition, it also consists of charting techniques and the observation of the traded volume. However, in the following we will deal exclusively with indicators. In our experience, the most popular indicators are the ones that are most popular:
- Moving averages
- RSI indicator
- MACD indicator
Moving averages are used to determine whether there is currently an upward, downward or sideways trend. For example, the 200-day line is popular and relevant on almost all markets. This moving average is calculated from the past 200 day candles. If the current price is therefore above the 200 day line, one speaks of an upward trend. However, the observation of the last 200 periods is also used on the 1 hour chart and on smaller units like the 1 minute or 5 minute chart. In addition, one can, for example, show two moving averages in the chart (with periods of different lengths).
When the two lines intersect, this can be a signal for a trade. Besides simple moving averages, there are also exponential moving averages and smooth moving averages. Often, however, it is sufficient to show a moving average in the chart as an “orientation guide”. In general, one should take care not to insert too many indicators into the chart. The danger is that the multitude of indicators will confuse you and you will end up not knowing whether there is a signal or not.
Another very popular indicator is the Relative Strength Index (RSI). This is not used to indicate the direction of the trend. Instead, the RSI is very well suited to determine the current state of the market. The indicator oscillates on a scale between the values 0 and 100, and the areas at 30 and 70 are particularly important: If the RSI is above 70, it is called an overbought market. In this case one should be careful with further long trades. This is because there is a danger that prices will soon turn downward. On the other hand, an oversold market situation exists if the indicator falls below the value of 30. In this case, an upward price turn is likely. However, a signal for a long trade is only given when the RSI crosses the 30 range again from bottom to top. The indicator can be used on all time units – this also applies to many other indicators. By default, the Relative Strength Index looks at the previous 14 periods.
The MACD (Moving Average Convergence / Divergence) is also a very frequently used indicator. It often provides signals quite similar to the RSI. It consists of two lines, namely the MACD line and the signal line. The MACD line is calculated by subtracting the exponential moving average of the last 26 periods from the exponential moving average of the last 12 periods. The signal line, on the other hand, is the exponential moving average of the last 9 periods. Signals are created by the direction of the MACD and signal lines as well as by the crossing of the two lines.
Like the RSI, the Stochastic also moves on a scale from 0 to 100 and, by default, looks at the last 14 periods. The results are often similar to those of the RSI and MACD.
As a trader, one is usually well advised to use the standard settings of an indicator. Because these are used by many other traders in the world. For this reason, in our experience, self-fulfilling prophecies often occur: For example, if many traders use the same indicator with the same settings, they will receive a signal for a long trade at the same time. For this reason, many new buy orders are placed, which in the end results in rising prices. Without the indicator, there might not have been a price increase at all. However, as a trader you should not worry too much about this. Rather, it is important to know with which indicators the majority of other traders trade. Because then one can guess at which points there will be movements in the chart.
This strategy also lends itself to the following consideration: nowadays, trading is increasingly done by computers. These trade automatically a certain strategy. The strategies are created by humans – often using indicators. In this way, the effect that technical indicators have on trading is significantly increased. It is expected that this phenomenon will increase even more in the future.
As we have shown, we should therefore use the default settings for moving averages as well, and concentrate mainly on the values 200 and 50 for the number of periods. Overall, it is recommended that trading with indicators should first be trained on a demo account. Nowadays you can open such an account for free at almost all Forex and CFD brokers. Often you will be provided with real prices, which is a great way to simulate trading. However, you do not trade with real money on the demo account, but with virtual capital. This way you can try out the various indicators at your leisure.
You should also test on which time units and markets you can achieve the best results with the respective indicators.
As already mentioned, it is advisable to limit yourself to as few indicators as possible. However, every signal of such an indicator should then be used consistently. In this way, trading will become more constant and ultimately more successful. In addition, you can also train chart analysis on a demo account. This is, as I said, another important part of technical analysis. As soon as you feel confident trading on the demo account, you can continue trading with real money. It is advisable to use only a small amount of money at first. If you have not yet found a good broker, you can also use our big broker comparison.