Best Indicators for Forex Trading

We are going to discuss the best indicators for Forex trading. These indicators are important buy and sell signals that can be used in any trading strategy. In our article on Forex technical indicators, we'll take a look at which Forex volume and trend indicators are the best.

We will start with the types of most commonly used indicators and then we will break down the best and most important forex indicators for traders.

If this is your first time on our site, IFC Markets team welcomes you! And if you are a novice trader we suggest you start from "What is Forex trading and how does it work" article.

No matter what type of trader you are (day trader, scalper, swing trader or trend trader), you need a Forex trend to be able to make a profit. The foreign exchange market must move up or down after your order is triggered, otherwise you will not have the opportunity to make a profit.

With these indicators, traders will be able to tell if prices will rise or fall. Technical indicators allow traders to easily identify price trends and predict where prices will move in the future.

KEY TAKEAWAYS

• Technical indicators are basically divided into two categories: leading and lagging indicators.
• These indicators are designed to show traders and investors the trend or direction of the asset they are trading.
• To find the best technical indicators for day trading, you should test several of them individually and then in the mix.

Types of Trading Indicators

Technical indicators are basically divided into two categories: leading and lagging indicators.

• Leading indicators are those that are ahead of the price movement. They give a signal before a new trend or reversal occurs. Leading technical indicator provides early warning and Forex trading signals about where the price will move.

  These indicators can determine the direction of the price trend even before a new trend begins. The downside is that leading indicators are notorious for their many false signals.

• Lagging indicators are those that follow price action. They give a signal after the start of a trend or reversal. The whole idea behind using lagging indicators to identify a trend is that they remove a lot of the market noise inherited from price and give you a much better idea of the trend.

  The downside is that the lagging indicator will only alert you to a trend after the trend has started.

Indicators in both categories are one of the following types:

• Trend
• Momentum
• Volatility or volume indicators.

Best Trading Indicators

Here are best trading indicators

• Moving Averages
• Bollinger Bands
• Awesome Oscillator
• Relative Strength Index
• Stochastic Oscillator
• Average True Range
• Parabolic SAR
• Momentum Indicator
• MACD
• and more

Best Volume Indicators

These indicators are designed to show traders and investors the trend or direction of the asset they are trading. The trend of an asset can be either bearish or bullish or without a clear direction. These indicators are used for market analysis.

Examples of Volume Indicators:

On-Balance indicator

On Balance Volume (OBV) is a volume indicator that calculates buying and selling pressure as a cumulative indicator - adding volume on up days and subtracting volume on down days.

Instead of meaning, focus on its direction.

• When both price and OBV make higher highs and higher lows, the uptrend is likely to continue.
• When both price and OBV form lower peaks and troughs, then the downtrend is likely to continue.
• When price continues to make higher peaks and OBV makes lower peaks, the uptrend is more likely to fail, which is known as a negative divergence.
• When price continues to form lower bottoms and OBV forms higher bottoms, then the downtrend is bound to fail, known as a positive divergence.

Volume RSI

One way to use this volume indicator can be to trade the signals generated at the crossovers of the indicator and the center 50% line around which it fluctuates.

• When the Volume RSI value exceeds 50%, it is considered bullish, indicating that bullish volume prevails over bearish volume.
• When the Volume RSI value is below 50%, it is considered bearish, indicating that bearish volume prevails over bullish volume.

Money Flow Index

The Money Flow Index (MFI) is a movement and volume indicator that analyzes both time and price to measure trading pressure – buying or selling. It is also known as the Volume-Weighted Relative Strength Index (RSI) as it also includes volume, unlike RSI which only includes price.

The Money Flow Index (MFI) can be interpreted in much the same way as the RSI. Trading signals are generated by this indicator when a stock signals bullish or bearish divergence, crossovers and when the stock is in the overbought or oversold zone.

Volume Price Trend Indicator

The volume price trend (VPT) indicator is a volume indicator that helps in determining a stock’s price direction and also the strength of price change. The indicator consists of a cumulative volume line that adds or subtracts a multiple of the percentage change in a share price’s trend and current volume, that is based on the security’s upward or downward movements.

VPT is similar to the on-balance volume (OBV) indicator - it measures cumulative volume and also provides traders with information about a security’s money flow.

Best Trend Indicators

The volume of trades is used to confirm or infirm a continuation or change in a stock direction. Many indicators are also based on volume. For example, the Money Flow Index is an oscillator tied to volume that measures the buying and selling pressure using both price and volume.

Moving Averages Indicator

A moving average is a trend indicator that constantly smooths out price data by making average prices. On a price chart, the moving average is a flat line that reduces fluctuations due to random price fluctuations.

You can analyze the angle of the moving average. If it mostly moves horizontally, then the price fluctuates.

• If the moving average line is pointing up, then the current trend is up.

  Note that moving averages do not predict the future value of a stock; they simply show what the price is doing over a period of time.

• Crossovers are another way to analyze moving averages. Traders can plot the 200-day and 50-day moving averages on the chart, a buy signal occurs when the 50-day moving average rises above the 200-day moving average. A sell signal occurs when the 50 day period falls below the 200 day period, as shown below:

Average direction index (ADX)

ADX is a single-line oscillating indicator with values from 0 to 100. ADX indicator only shows the strength of a trend, but not its direction.

• The ADX trend strength indicator looks like this:
• When ADX is greater than 25, the trend strength is sufficient for trend following strategies.
• When the ADX is less than 25, traders should avoid using trend trading strategies because the market is in an accumulation or distribution phase.
• ADX readings above 50 indicate a very strong trend.

Parabolic SAR Indicator

Parabolic SAR indicator looks like a series of dots above or below the price bars. A dot below the price indicates a bullish signal, while a dot above the price shows that the bears are in control and that momentum may remain down.

Best Indicators for Day Trading

To find the best technical indicators for day trading, you should test several of them individually and then in the mix. You may end up sticking with, say, four that are evergreen, or you may switch off, depending on the asset you are trading or the market conditions of the day.

Whether you're intraday trading stocks, forex, it's often best to keep technical indicators simple.

Here are some of the most popular technical indicators that you can use to start improving your trades.

RSI Indicator

The RSI indicator can suggest overbought or oversold conditions by measuring the price momentum of an asset, it is suggested that the momentum reaching 30 (on a scale of zero to 100) was a sign of an asset being oversold—and thus a buying opportunity—and a 70% level was a sign of an asset being overbought—and thus a selling or short-selling opportunity.

MACD Indicator

MACD indicator consists of two chart lines. The MACD line is created by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. EMA is the average price of an asset over a certain period of time, with the most recent prices given more weight than more distant prices.

The second line is a signal line and is a nine-period EMA. A bearish trend is signaled when the MACD line crosses below the signal line; a bullish trend is signaled when the MACD line crosses the signal line.

Fibonacci Retracements

Fibonacci retracements are a leading indicator that uses Fibonacci numbers to identify specific areas of price support or resistance along the line between low and high price: 0%, 23.6%, 38.2%, 50%, 61.8% and 100% trend line.

Interest can be applied to the difference between the minimum and maximum prices for the specified period. Fibonacci retracement levels may indicate areas where prices may see a reversal, returning to a previous trend.

Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator based on closing price trends and can be used to determine overbought and oversold levels. This is a range indicator, with 0 at the bottom and 100 at the top. Using this range, you can find sell signals when the line crosses below level 80 and buy signals when it crosses level 20 from below 5.

Bottom Line on Best Forex Indicators

Whatever indicators you choose, be sure to analyze them and take notes on their performance over time. Ask yourself:

• What are the disadvantages of the indicator?
• Does it give a lot of false signals?
• Does he send signals that lead to missed opportunities?
• Is the signal too early?
• Signaling too late?

You may find that one indicator is effective in stock trading, but not in, say, forex. You may want to replace the indicator with another of the same type, or make changes to the way it is calculated. Making such assessments is a key part of success when day trading using technical indicators.

You can also customize your chosen indicators: you can change the numbers used in the Fibonacci retracement and set the top line to, say, 78.3% instead of 61.9%.

You must be ready and willing to tweak the indicators to suit what works best for you and gives you the results you are looking for.

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