Best Forex Indicators
While forex trading can be profitable, it is not an easy path, especially for a beginner. Despite that, investors continue to earn decently from forex trading platforms with the use of forex indicators.
The article is part of the forex trading for beginners and will take you through the top ten forex indicators every trader should start using today. As you’re about to find out, trading indicators are a key part of forex trading, which is why traders and analysts ought to clearly comprehend their basis and use it to buy and sell currencies effectively.
Let’s start with the best forex indicators for technical analysis of forex pairs.
1. Relative Strength Index (RSI)
The RSI is a measurement index used by traders to assess the price momentum of a security. It serves the purpose of measuring how quickly traders are bidding the price of the security, gaining momentum on the long or short side. This result is reflected on a scale of 0 to 100. The index shows the point where the price will most likely reverse if the values of 70 to the upside or 30 to the downside are reached.
In a downtrend, the price moves below 30, suggesting an upcoming bullish market reversal. However, upward price trends are marked by values above 70, indicating a potential bearish market reversal to come. The RSI does not indicate how far a correction will most likely go.
2. Moving Averages
Moving averages are popular forex trading technical indicators primarily used with the period lengths 9, 20, 50, and 200 day periods. Since the central banks and multi-national corporations move foreign exchange markets, traders need to understand the market action at the macro level. Moving averages are overall price sentiment indicators that represent the average price of the n previous candles. In other words, a moving average represents the average closing price of the market over a certain time duration.
When prices remain above a moving average, it indicates that the buyers control prices while prices that trade below the moving average suggest sellers are controlling prices. When trading forex, you want to focus on buying when the price is above the moving average and close to it or if the prices are far below the moving average for an upcoming bullish reversal in the direction of the moving averages. Moving averages can be interpreted as a rubber band that contracts and widens.
There is a difference between simple moving averages and exponential moving averages. The SMA takes the previous periods with equal weight into consideration, while the EMA gives the most recent periods a higher value in the average.
3. Bollinger Bands
The Bollinger Bands can also be used as a forex indicator and was developed by an American technical analyst, John A. Bollinger. Compared to some other technical indicators, novice traders will find this one relatively easy to use.
This technical indicator features a classical moving average at the center and two upside and downside standard deviations. It reflects the upper and lower lines as dynamic support and resistance levels.
Touching the upper band denotes a potential short trade with the moving average in the center as a target, while touching the lower band indicates a potential long trade with the moving average as target. Also, any candle close above or below the centerline at the middle creates an opportunity for testing the higher band and vise versa for the short side. Bollinger Bands work best in sideways markets.
Featuring an exponential moving average and a histogram, the moving average convergence divergence (MACD) trading indicator is one of the tools used to evaluate price deflection.
The hidden divergence between price and MACD indicates market continuation, while their regular divergence suggests market reversal.
MACD is primarily used to create trading strategies. Its been used to identify a continuation point or possible point of market reversal. The standard settings of the MACD are 12-26-9 based on the closing price.
Founded in the 1950s, this is a common momentum forex indicator to identify the oversold or overbought zones. It predicts trend reversals and focuses on price momentum movements. According to the stochastic indicator, the momentum of the price of an instrument changes before the actual change in the direction of that instrument.
To identify a profit-point in a trading plan, a trader uses this indicator to locate the point of price reversal. Just like the RSI, the stochastic indicator moves on a scale of 0 to 100.
When the price goes beyond a level of 75, it signals a likely price short reversal, and if the price plunges below 25, then a possible bullish reversal is underway.
6. Fibonacci Retracements
Fibonacci was formed by a famous Italian mathematician called Leonardo Fibonacci. He created the tool to help traders understand market direction more accurately. The indicator is commonly associated with Leonardo’s golden ratio, 1.618. Forex traders rely on this ratio to pick out market reversals as well as the trading profit areas.
Leonardo Fibonacci believed that if prices shift with a specific trend, correct in the direction of 61.8% Fibonacci reversal, and indicate a market reversal, the prices could shift 161.8% Fibonacci extension point of the current leg.
It’s equally important to note that other Fibonacci levels do exist, including 23.6%, 38.2%, 50.0%, 88.6%, 127.0%, 261.8%, and more, depending on the market momentum and behavior.
7. Ichimoku Kinko Hyo
Ichimoku Kinko Hyo is also known as the Ichimoku Cloud, and it features an indicator capable of executing a whole trading strategy. Multiple market aspects can be identified using this single trading indicator.
The first Ichimoku indicator, the Komu Cloud, enables traders to understand the market context. When prices are below the Komu Cloud, it generally signals a bearish trend, while prices above the Kumo Cloud indicate a bullish market.
The two other vital elements of this indicator include the Kijun Sen and the Tenkan Sen. These, unlike the Komu Cloud, are made with the moving averages’ concept. The two lines move with the price, and rejection from them signals an entry point.
8. Parabolic SAR
Parabolic SAR is one of the most simplistic trend indicators. Using the Parabolic SAR signal line, traders can interpret the market trend of a pair of currencies. For example, if the price falls below the Parabolic SAR indicator, it signals a bearish trend. A price above the Parabolic SAR, however, suggests a bullish trend.
Forex traders rely on the Parabolic SAR to pick out the market trend. Additionally, a possible entry point can also be depicted by a market rejection from the Parabolic SAR indicator.
9. Pivot Point
Pivot Point indicators show a currency pair’s supply and demand equilibrium. When an equilibrium price point is reached, it indicates an equal demand and supply of that particular currency pair.
However, if the price soars beyond the pivot point, it shows that the currency pair’s demand is high. A price point below the pivot point suggests that the supply of that currency pair is high.
Whichever direction currency pairs end up taking, prices tend to move to the equilibrium level before taking either direction in a typical currency trading setup. It, therefore, means that the Pivot Point indicator offers a possible entry point to trades from the pivot point’s rejection.
Pivot points are typically calculated on the previous day price action. Therefore it can only be applied to an intraday chart.
10. Average True Range
The Average True Range (ATR) indicates the volatility of a pair of currencies. Volatility measurement is crucial in the forex market as it relates to the price movement of the market. If a financial market’s volatility increases, it depicts the market’s reversal. A decrease in volatility designates market continuation.
This indicator states that the higher the ATR, the higher the volatility, and the lower the ATR, the lower the volatility. So, with low volatility, you can extend your profit-taking point. Further, if the volatility is low, there’s a possibility of finding reversal trade setups.
Many trading systems use the ATR for position sizing calculation. It can also be used to find the most volatile forex pairs.
Best Forex Trading Indicators Summary
Most forex trading platforms feature the mentioned best forex trading indicators directly or by using an expert advisor. MetaTrader 4 and MetaTrader 5 are the best-known platforms for trading FX. No matter what indicator you go for, you have to master it before taking action. All indicators are lagging since the price is the only aspect that happens in real-time, and all indicators are some type of averages of previous periods. As a trader, strive to properly grasp these common forex indicators and apply several of them with different parameters to increase the chance of a favorable movement in the market. The focus should be the set of indicators and time frames institutional traders use.
It is important to understand that an indicator can only support your market bias opinion. There are no trading systems available that are profitable in the long run by just relying upon one indicator. Fundamental data can be helpful too when evaluating the potential market direction, and excellent forex money management is needed to stay profitable.