The vast majority of Forex investors use different indicators for reading charts and getting relevant trades. Many indicators are initially derived from the levels of exchange rates and they show the dynamics of changes in the market.
Investors who prefer to trade futures use indicators to observe such market parameters as open interest and volume. The best thing is that a trader can simultaneously apply several Forex indicators into a trading plan. It is easier to practice skills and get analytical knowledge through the data provided by the popular trading indicators.
What are Forex indicators?
These are mathematical calculations based on the exchange rates, open interest or volume of a certain currency pair. The indicators may also represent the price of stocks. Major Forex indicators are based on the exchange rates. FX indicators help people trade because they provide solid technical analysis and reliable signals. There is less guesswork and more trustworthy data.
If you are new to the concept of Forex trading, it is better to find a good reputable broker. A personal manager can tell you how to trade with indicators for reading charts. For instance, AMarkets offers such a service.
Beginners often ask where to find the best indicators for trading. One way is to counsel a broker. Also, all MetaTrader trading platforms offer a variety of popular and useful indicators. Just open an account, download MT (mobile or desktop) and test the in-built indicators. Some brokers also offer customized versions of MetaTrader 4 or 5, boosted with unique or upgraded indicators.
Major types of Forex indicators
What makes a great indicator? There are a few ways to answer this frequently asked question. Though, generally, a good indicator offers broad applicability to many trading strategies, with clearly readable signals and relevant data.
All major technical indicators can be divided into 5 categories. Besides, every category has two subcategories: leading and lagging. A leading indicator shows where the price rises. A lagging indicator reveals the background conditions with the price in motion. There are also leading or lagging volume indicators.
2 categories of lagging Forex indicators:
- Trend indicators show if a Forex market moves up, down, sideways or stays calm;
- Mean reversion tools indicate how the price range shifts under different circumstances;
2 categories of leading Forex indicators:
- Momentum indicators measure the price’s speed, and the way it changes over time;
- Relative strength indicators evaluate oscillations in a selling or buying scenario;
Popular Forex trading indicators
To avoid ineffective signals, a trader must carefully pick trading indicators. The best strategy of testing a new indicator is to set it up and then observe if its output helps your analysis. Below you will find examples of a few popular FX indicators that are in use by many traders.
- Moving Average
It helps to identify and then follow the market’s trend. It simply follows the price of a chosen currency pair. It eliminates the noise around the price and quickly follows a major trend. It can’t predict the future price. Though, moving average helps to understand current market direction.
- Simple identification of market trends
- Reversal of trends
- Research for resistance and support levels
- May lag behind the price in real-time trading
- Good analysis, but mainly for novices who hesitate to sell/buy a currency pair
- MACD (a.k.a. Moving Average Convergence/Divergence)
If you wish to know the current market phase, this sophisticated tool is a good solution. MACD tallies up the signals for defining the market’s direction. It provides signals for when the market is going to be calm and when it goes in another direction.
This indicator mostly moves on averages but also uses formulas known as “oscillators”. They are revealed in different small windows (located below the market price chart). When MACD returns to 0 or even lower it means that drastic price drop is coming. That is how it predicts.
- Good for reading FX markets in different situations
- It is easy to read the oscillators with MACD
- Can lag behind the price chart
- Trading signals may appear late
- Bollinger Bands
Bollinger Bands (BB) is an indicator for evaluating volatility. To be precise, a trader can measure the level of price fluctuations. BB tool puts the current price in a small window, surrounded by 2 outside lines. While the middle line shows the revolving price, BB tests the levels beyond outside lines. However, it is limited to a short period of action. After shifting from the central zone, the price mark returns to the middle line of BB. The narrower the range, the lower volatility is.
- The most relevant indicator for markets going sideways
- Indicator lines are good for resistance/support levels
- Not good for trending markets
- Proper to use when the market is calm - it can’t predict trends or trading systems
- Relative Strength Index (RSI)
The RSI is an oscillator, just like MACD, but its movement happens between 0 and 100. Traders prefer interpreting RSI indicators when the price seem “overbought”. This becomes obvious when the histogram is over 70 (the oversold price is revealed when the indicator moves under 30). If the mark at 30 and below happens for a long time, it is a typical downtrend scenario.
The indicator shows rather accurate overbought and oversold marks. However, do not expect the time-accurate signals if you trade on trends. Generally, you ought to buy when the indicator shows the “oversold” scenario (uptrend) and trade on short order in the “overbought” scenario (downtrend).
- On-Balance Volume (OBV)
OBV, or just Volume, is considered quite useful. It manages to capture data of market volume and interpret it into a one-line chart. OBV shows how the cumulative pressure of buying/selling orders adds up the volume on uptrend days and decreases on downtrend days. In a perfect trading situation, the indicator will confirm a daily trend. If the price rises, OBV rises as well, and vice versa.
- Stochastic Indicator
Traders like to use this momentum indicator to compare the closing price of a chosen currency to the price range during a certain period. Unlike other indicators in this category, the stochastic indicator never reveals oversold/overbought terms. It is purely a momentum indicator.
When it hits the 80 mark, one should not interpret an asset as overbought. Similarly, when it hits the 30 mark, it isn’t necessarily oversold. This is a common reason why novice traders misinterpret signals from this indicator.
Advice from experienced traders: never sell the trade when the indicator hits over 80. You may buy the trade in the overbought market a bit later. Sell only when the indicator hits below 80, though wait for confirmation from another leading indicator. Like RSI, the stochastic indicator belongs to lagging tools. This means it provides signals after a move (not real-time).
- It is possible to find good trades using support/resistance and price signals
- Integrates into many trading strategies
- A momentum indicator
- Prone to misinterpretation
- No accurate real-time signals
- Recommended for experienced traders only
If you want to learn how to read charts with these indications, consider taking a training course or using the free educational tips offered by reputable brokers, like AMarkets.
Many Forex trading platforms offer all above-mentioned indicators. Experienced and tech-savvy brokerage companies develop their own technical indicators. Such Forex indicators may provide new approaches to chart reading, as well as grant new insights to improve a trading strategy.
Surely, custom trading indicators are available only for select clients. Traders may also switch brokers to access better or more befitting indicators. For instance, AMarkets is among the very few brokerage companies on Forex market, that has developed unique indicators.
Let’s take a look at custom indicators developed by AMarkets:
This sentiment indicator tallies up the percentage of bulls and bears in the market. In other words, optimistic and pessimistic trends. This way, a trader may quickly see a dominating trend to buy or sell trades.
Thanks to a fixed range of values ranging from 0 to 100, the Cayman indicator shows the volume of purchases for a major currency pair. The range is never 0 or 100, but when the levels are about 30 and 70, it means that one direction (buy or sell) currently dominates the market. It is a good signal to trade on the slowdown trend and correct a strategy.
2. Order Book
To analyze all open trades and pending orders AMarkets clients can use the aggregate position indicator. It is a popular indicator for trading major currency pairs. It gives the interpretation of market behavior. Price fluctuations are revealed under the pressure of non-realized losses or profits. The chart is divided into 2 key zones with Sell and Buy orders. It reveals the maximum amount of all open trades during previous 15 minutes.
More than a technical indicator – it is a whole new system of Forex trading signals. Autochartist gives users of AMarkets a list of the most relevant and profitable tips. Moreover, each signal is linked to a particular instrument or a chart pattern, and defines the direction of price fluctuations. Thus, a trader receives a specific target for upcoming trading strategy.
One of the leading AMarkets technical analysts, Alex Melkumyants, believes it is worth trading only when the chosen indicators can measure both trends and social scenarios. Such approach may help build a sound trading strategy for the years ahead, despite the constantly changing trends on the Forex market. Opening a brokerage account costs nothing but it could lead to a successful Forex trading career.
Beginner traders have to understand 2 things only about technical indicators:
- All indicators have pros and cons, there are no flawless trading systems.
- One should use several indicators simultaneously to get trustworthy Forex trading signals. At least 4 indicators for daily trading.
There are fundamental trading strategies and techniques, but none can work without good indicators. Ask your broker about what popular Forex indicators you can access on a trading platform. Good luck in trading!