Best Forex indicators help you understand the volatile price movements of the market. As a Forex trader, you cannot leave everything on luck. In fact, there is hardly any role luck plays in successful trades. To maximize your profits in the Forex market, make informed decisions based on real facts, figures, and data. This is where trading indicators can help you.
Definition of forex indicators
Trading indicators are technical analysis tools that highlight price signals and trends. They depict warnings, reversals, and market situations in the Forex market. Moreover, trading indicators can be used for both bullish and bearish markets.
Best Forex Indicators
There are heaps of Forex trading indicators that you can use. The following list mentions just some of the most commonly used among beginner and experienced traders. Feel free to take what you can and apply them to your strategy accordingly.
1. Moving averages
Moving averages are one of the most popular indicators in forex trading. It belongs to a family of trend indicators and tells about the overall market trend. When we talk about the calculation, a moving average is a simple calculation that takes the average price of a currency pair over a specific period. The most commonly used periods are 20, 50, 100, and 200 days. You can use the MA in various strategies. When the price crosses below or above the MA, it may signal a potential change in trend.
Another common strategy is to combine the two MAs.
When the short-term MA crosses above the long-term MA, it’s considered a bullish signal. On the other hand, when the short-term MA crosses below the long-term MA, it’s a sign of a downtrend.
There are different types of MAs you can use. These include;
- EMA (Exponential Moving Average)
- SMA (Simple Moving Average)
- WMA (Weighted Moving Average)
- VWMA (Volume Weighted Moving Average)
Their calculation differs slightly from the traditional MA, but the concept remains the same.
2. MACD (Moving Average Convergence Divergence)
MACD is one of the most used technical indicators that are based on the trends and it involves moving averages and histograms. It consists of two lines: Situations Include the MACD line and the signal line. Again, the MACD line is a graphic result of the subtraction of two moving averages and the signal line is the moving average of the MACD line. It is common to have three types of uses of MACD; first, the indication of potential trend reversal by traders; second, affirmation of trends; third, generation of buy or sell signals. This is because, when the MACD line crosses the signal line up, it indicates a bullish formation while when the MAC technical indicator crosses the signal line down, it indicates a bearish formation.
3. Parabolic SAR (Stop and Reverse)
Traders use the Parabolic SAR as an indicator to identify potential entry and exit points in a given trend. It consists of dots placed above or below the price line to indicate the trend direction. If the dots are below the price it depicts an uptrend while if the dots are above the price it depicts a downtrend. The use of the Parabolic SAR is that it can give a trader an opportunity to set his stop-loss or to know when to get out.
4. RSI (Relative Strength Index)
The Relative Strength Index also referred to as RSI is an oscillator that measures the speed and the change of price rates. It is ranges between zero and one hundred and is normally represented as a line graph below the price graph. To single out the overbought or oversold state the RSI is employed among traders. If the RSI reading is above the 70 level it gives the indication that at the particular period, the market is over bought and may require a reversal or correction. On the other hand, when the RSI is below 30, it means that is oversold and it is likely to have an upward move.
The RSI can also be used to form purchase signals as well as sales signals. For instance, when the RSI goes up beyond 30, then one will have a buy signal when the RSI goes below 70, it is a sell signal. Since the Relative Strength Index (RSI) is less applicable for general trend identification compared to Moving Averages, its popularity is undeniable as a specific tool that acts like a traffic light for overbought/oversold zones. This common simple technical tool was designed to quantify the oscillations in markets in terms of both size and speed. It provides trading signals on whether an investment is overbought or oversold, which in essence provides the best chances of a reversal. The RSI ranges from 0 to 100, with high readings indicating overbought conditions and low readings signaling oversold conditions.
5. Stochastic
Stochastic is considered one of the top forex indicators that help traders identify momentum and overbought/oversold zones.
In forex trading, the stochastic oscillator helps recognize any trends that are likely to be a reversal. A stochastic indicator can measure the momentum by comparing the closing price and the trading range over a certain period
6. Bollinger Bands
When you start trading, you’ll always hear Bollinger Bands for every beginner tutorial you watch. Bollinger Bands consist of three lines: the upper, lower, and middle, and measure the price volatility. You calculate the upper and lower bands by adding and subtracting a multiple of the standard deviation of the price from the middle band. The middle band is a simple moving price average over a specific period. The Bollinger Bands create a channel on the chart, with the upper and lower bands acting as support and resistance levels.
When the price moves toward the upper band, it’s considered overbought, and we may encounter a bearish reversal. Conversely, when the price moves toward the lower band, it indicates that the market has become oversold, suggesting a potential bullish reversal.
7. On-Balance Volume (OBV)
On-Balance Volume (OBV) is a volume indicator that calculates the cumulative volume of buying and selling pressure. It sums the value on days when the stock price was higher and subtracts the value on days when the stock price was lower in order to develop a continual count. OBV is also applied by the traders, as it helps to determine the strength of a certain trend. When the OBV rises alongside the price, it indicates increased buying volume, suggesting that prices are likely to continue climbing. If OBV is declining while the price is rising, consider entering the market long to capitalize on the potential trend reversal. OBV can also be used in technical analysis to identify instances where the price fails to match the volume, as it reveals new trends.
8. Accumulation/Distribution Line
You can compile the Accumulation/Distribution Line as one of the volume-based indicators, which reveals whether there is purchasing or selling pressure in a particular stock. In this formula, both price and volume are put into consideration when computing the buying and selling pressure.
The indicator, therefore, helps traders to confirm the strength of a particular trend using the Accumulation/Distribution Line. When the line is parallel to the horizontal line to the top of the chart, it means that the stock is experiencing buying pressure and the trend will persist. On the other hand, if the line declines, it may indicate selling pressure, which could lead to a reversal of the trend. Using AB=CD, you can also highlight the divergence between price and volume, which typically indicates a trend change.
9. Volume Weighted Average Price (VWAP)
VWAP standing for Volume Weighted Average Price is one of the volume type indicators which shows the average price during a certain period taking volume into account. They use it to calculate the average price at which the security has been priced throughout the day by the institution. By so doing, traders are able to set typical or average price of a security as well as determine if the going rate is high or low. When the VWAP line is above the price line, it indicates that the security is overpriced. Conversely, when the price line falls below the VWAP line, it suggests that the market undervalues the security. Moreover, traders can use VWAP to determine support and resistance levels. If the price keeps going above this VWAP then it becomes a support level and if the price on the other hand keeps going below this VWAP, then it becomes a resistance level.
10. Fibonacci retracements
Fibonacci retracements use a special series of numbers that would inform you where support and resistance will be taking place. The resistance level is where an asset’s price stops rising and begins to decline, while the support level is where a decline halts and the price starts to rise.
Thus it has been made clear that price levels are derived from the Fibonacci numbers 23. 6%, 38%. 2%, 61. 8%, and 78. 6%, that informs you on the extent of a currency pair’s price pulled back in the past. Considering it will help you predict whether the market will drop or shift forward.
It is also easy to determine the stop and limit orders where to apply through the support and resistance levels. It also helps you pinpoint where you make and take your positions. For instance, when a price gets to the bottom of a resistance level, it becomes a signal that this is a good time to sell and go out of the market. When the price hits a support level, it’s advisable to enter a buy position as the market tends to rise.
Frequently Asked Questions
How many indicators should I use in my trading strategy?
- The number of indicators to use in a trading strategy depends with the trader and his/her trading personality. Actually some traders prefer to rely on one or two indicators while others may use a number of indicators. At the same time, many indicators are confusing and create contradictory signals, so one should find the optimal number of these cues.
Can I use multiple indicators together?
- Indeed, more than one indicator can be joined together in the trading plan. The use of multiple indicators can also give out a better view of the market status and can also verify trade signals. However, you must ensure that the indicators you measure align to provide meaningful information.
How often should I update my indicators?
- The update frequency of some indicators should vary depending on the trading time frame in use. This means some indicators need more frequent updates depending on their calculation period, while others need less. To keep your indicators efficient, reassess them periodically based on market changes and your trading system.
Are there any free forex indicators available?
- Indeed, a simple search can help you find countless free forex indicators that can help you out. Numerous free indicators are available online, on forex trading forums, trading sites, and various platforms. Before incorporating them in your trading strategy, the indicators should be studied and its reliability & efficiency verified.
