Foreign exchange is the largest and most liquid market in the world. That’s why many people are getting into trading or investing in the Forex market. However, when it comes to Forex trading, there are some challenges that you will face, and one of them is the unpredictable prices on the currency market that constantly change. But no worries, because there are great forex indicators that you can use to be able to forecast the price changes in the currency market.
Forex indicators or also known as technical indicators. They consist of mathematical calculations, and they are usually used by forex traders based on the exchange rate, open interest, or volume of a currency pair. The price of a stock is usually observed by technical traders who operate in the stock market. Forex traders, on the other hand, observe the exchange rate of a currency pair. And the majority of the major forex indicators are computed from exchange rates.
If you’ve experienced using any kind of charting packages to assist you with forex trading, then you probably know that there are different technical indicators that you can use.
Here are the four main types of forex indicators that you might encounter:
Trend Indicators: Trend indicators, as the name suggests, are used in identifying a trend. It is commonly argued that you should only trade with the trend. Therefore, these indicators will help you make the decision out of your hands and dictate which way you should be trading. The only decision that you need to make is what level to enter the trade.
Momentum Indicators: These types of forex indicators are fundamentally oscillating indicators. They are most useful when it comes to determining overbought and oversold positions. They can be very useful to signal the beginning of a new trend.
Volume Indicators: These types of indicators show the volume of trades behind a specific price movement. This is extremely beneficial because a price movement is backed up by high volume. It is a much stronger signal compared to a price movement based on low volume.
Volatility Indicators: These types of indicators commonly use ranges to show the behavior of the price and the volume behind any movements. It is a useful indicator because any dramatic change in behavior can give a good entry signal.
The Best Forex Indicators You Can Use Today
Under those four main types of forex indicators are specific technical indicators that you can use in trading. However, not all technical forex indicators have equal popularity or helpfulness between traders. It’s because some can only be used in very specific cases while some are used primarily by derivatives traders, and others might not be used regularly on most technical trader’s screens.
Therefore, when choosing a great forex indicator, you need to pick one that has broad applicability to many traders. It should offer clear signals that can be observed readily and used to trade on, and as well as provide useful information that is relevant to those who are looking to determine the direction of exchange rates in the future.
To help you out, we are going to give you some of the best technical indicators that you can use. These forex indicators are the best ones used by forex traders, and some of them belong to the MetaTrader 4 or MT4 trading platform that enables traders to add indicators right into trading graphs.
1. Relative Strength Index
The relative strength index or RSI was created by J. Welles Wilder, a famous technical analyst. This forex indicator has been used by traders since 1978 when it was first published. Today, it holds a top position among the forex indicators used by traders. In fact, most technical software includes this indicator.
To compute the RSI, you will be comparing the amount of a currency pairs’ most recent exchange rate increases to the most recent exchange rate drops. This indicator has an adjustable time period parameter. Most brokers use the default 14 periods based on the preference of Wilder.
For many technical analysts, the RSI is a bounded oscillator. It’s because it fluctuates inside a range that is bounded by an upper value of 100 and a lower value of 0. Its value does not have the same straight up scale as the exchange rate. Therefore, this forex indicator is usually displayed below the exchange rate in an indicator box.
When the RSI moves extremely high above the 70 level, then the market is considered overbought. However, when it lies below the 30 level, this means that the market is oversold.
2. Bollinger Bands
Bollinger Bands were made in the 1980s by John Bollinger. It’s created to provide trading signals that adapt to market conditions. This forex indicator is usually drawn using a given number of standard deviations around a central moving average.
One of the common set of parameters for Bollinger Bands includes drawing lines two standard deviations around a 20-period simple moving average. This gives traders a sense of risk involved in taking positions since standard deviations are used as a measure of market volatility. It is also a sign that an exchange rate movement is overdone and hence suitable for a correction.
This forex indicator can also involve selling a currency pair when it trades above the indicator’s upper line and buying when it trades below the lower line. You can improve this tactic by only taking trades that follow the existing trend as recommended by the slope of the central moving average.
3. Moving Averages
A lot of forex traders use moving averages of one type or another to be able to get a sense of the fundamental direction or trend of the market. It can also be used to provide trading signals, like when a shorter-term moving average crosses above or below a longer-term moving average.
The moving averages forex indicator has four fundamental types. They are simple moving averages, exponential moving averages, weighted moving averages, and smoothed moving average. The averaging process can be used on the high, low, open, or closing exchange rates. The most popular is the close one.
For instance, you can compute a simple moving average by adding up the exchange rates over a given number of time periods. After that, you will then divide the sum by the number of time periods to get the average. This process then continues over time or moves to make an indicator line that is usually shown on the tip of the exchange rate for a currency pair.
4. Moving Average Convergence Divergence
The Moving Average Convergence Divergence or MACD is a forex indicator that was created by Gerald Appel. Its histogram is unbounded, and it normally appears below the price action. It uses the same time scale as the exchange rate chart it links to. This forex indicator is based on the difference between two exponentially weighted moving averages or EMAs. It usually consists of a faster one of 12 periods and a slower one of 26 periods. It also comprises a smoothed moving average or SMA line of typically nine periods used to signal trades.
5. Stochastic Oscillator
The Stochastic Oscillator was created by George C. Lane in the 1950s. This forex indicator helps traders identify market extremes that are ready for corrections. Just like the RSI, this indicator is standardized to range between 0 and 100. Though, overbought values exceed 80 while oversold values are lower than 20.
This technical indicator comes in full, fast, and slow variations. Each of them has the characteristic %K line based on the market’s close comparative to the high-low range for a particular time frame, added the %D signal line computed as a moving average of the %K line.
The Stochastic Oscillator can inform traders about accumulation and distribution in the market. For example, if the market closes around the stochastic high values, then it suggests that buying pressure exists, meaning the market is accumulating. In contrast, when the market closes near the low value of the indicator, this reflects selling pressure that includes distribution.
These are some of the best forex indicators that you can use today. Remember that simplicity and ease of use are essential when you make trading decisions. We hope that this list will be able to help you find the perfect forex indicators that will help you become successful in Forex trading.