What are the Best Indicators for Forex Trading?
- August 3, 2021
- Posted by: Daniel Richard
- Category: Forex Trading
In the forex trading platform, traders always want to earn a lot of profit, but sometimes, they also lose all of their money while trading. So, it is important to apply the correct tool for starting your trade which will help you to be a successful trader. In this case, some best forex indicators will give you the right direction for making the right decision while trading.
Though it is somewhat tough to succeed in forex trading, some indicators can guide you to trade successfully. There are many different types of indicators in the forex trading world; in this article, you will get an idea about the five most essential indicators.
What are Forex Indicators?
The forex indicators are a large part of the technical analysis. It is a mathematical calculation that forex traders broadly use to observe the price movement. If you add the best indicators to your trading strategy, you will trade in the right way. So, it is the most important thing to add the best forex indicators in your trading strategy before starting your business.
By including the forex indicators in your trading system, you can calculate the present and past price movement in the market. At the same time, you also identify the future price movement by analyzing the present and past price activity. The forex traders use the indicators to observe the price rate of the currency pair.
If you are not an expert or do not have enough time to monitor the market sentiment, the indicators will help you to minimize your pressure of market monitoring. They will also help the traders to maximize their profit. Forex indicators are part and parcel of the technical analysis, and the technical analysis is also part of successful forex trading.
In the forex trading world, you will find different types of indicators. The most popular technical indicators are-
- Different types of Moving Average
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI)
- Bollinger Bands (BB)
- Stochastic Oscillators
- Balance of Power
- Advance price
- Zig zag, etc.
These indicators are available in the forex trading platform. These will help you to trade appropriately by forecasting the future market sentiment and the price action. Experienced traders use the best indicators for making a solid trading strategy. Moreover, if your trading strategy is strong, your trade will be profitable.
How Indicators Help You Trade?
There are many active forex traders, who use the indicators for technically analyzing the market movement, more specifically, the currency movement. The forex indicators help the forex traders to provide direction, and by following the direction, traders can easily make the right trading decision.
These indicators also deliver the past and present currency rate information, and by using the provided information, traders can make a suitable investment plan. And an appropriate investment plan can instruct you which time is favorable for buying or selling as a trader. So, you need to study different indicators and choose the best indicator for making the best portfolio.
Some of the Top Forex Indicators
You have already noticed that there are many different types of indicators used by forex traders. Now you are going to know broadly about the best indicators and how they work and help you to trade.
- Moving Average
Moving average is the most critical indicator in forex trading. Traders can identify the past price action by calculating some particular day’s price movements. Generally, traders use the ten, twenty, or fifty days closing price for calculating the moving average, but sometimes, they also use the 100 or 200 days closing price. Moving average indicates the possible future price action, based on which you will get an appropriate trading signal.
It is called that moving average is the life of technical forex analysis. You can identify the possible support and resistance area by using the moving average indicator. It is also used as a speedometer of support and resistance levels.
There are four types of moving averages that are used extensively by the forex traders, which are
- The Simple moving average
- The Exponential moving average
- The Smoothed moving average, and
- The Weighted moving average
This indicator calculates the average of high, low, middle, open, and closing exchange rates. Though the close is the most popular, you can calculate any kind as you wish.
For understanding the moving average clearly, we can use an example—suppose you want to calculate the close twenty days moving average. First, you have to add everyday exchange rates of twenty days, then divide the total amount by the total period, twenty days. The result of this calculation is the average. This average then moves to create a new indicator line, and it also indicates the exchange rate of a currency pair.
The simple moving average is the popular method for getting the proper signal for buying and selling. When the moving average price is above the current market price, this time or situation is convenient for buying. On the other hand, when the moving average price is under the current market price, this time is favorable for selling. The ten, fifty, and two hundred-day moving average timeframes are the most popular to forex traders. Ten days is the short term, fifty days is the middle term, and two hundred days is the long term moving average timeframe.
- Relative Strength Index (RSI)
The RSI is the short form of the “Relative Strength Index.” It is the forex trading indicator, and it indicates the overbought or oversold situation in the market. You will find 0 to 100 scales in a relative strength index. Under thirty on a scale indicates the oversold; on the contrary, above seventy on an RSI scale shows the overbought.
You can easily identify the situation of overbought or oversold by using the top and bottom points. Suppose the market price decreases, and at the same time, the RSI also decreases. In this situation, the market indicates that now there is no seller in the market, and also all the traders go for buying. For this reason, basically, the price will start to increase.
You can be sure about the new trend in the market by the relative strength index indicator. If you think that the market is starting a new direction, and you want to trade here, first, you will look for the information whether the RSI is under or above 50. If you wish for an uptrend, you will wait until the RSI goes above 50, but if you want to trade in a downtrend, you have to wait until the RSI goes under 50.
- Moving Average Convergence Divergence (MACD)
Gerald Appel first developed this indicator—”Moving Average Convergence Divergence.” According to Gerald Appel, the MACD is favorable for the first and slow market, and it shows the distinction between the two moving averages. There are no upper and lower limits in this indicator because the MACD movement and price movement co-occur.
Now, let’s start to understand how the MACD indicators are created.
- The signal line: The signal line represents the change of the price movements. The nine-period price action shows here.
- The “Moving Average Convergence Divergence” line: The MACD line calculates the distinction of two moving averages. This line has been made by excluding the twenty-six-period moving average from the value of the twelve-periods moving average.
- The histogram: The histogram evaluates the contrast between the MACD line and this particular signal line.
The MACD line crosses one another, and it also indicates the signal of changing trend. Even when the MACD histogram places above 0 value, it refers to the bullish market; on the contrary, when the MACD histogram places under 0 value, it relates to the bearish market.
You can take the sell signal if the MACD line passes over this particular signal line from above. In contrast, if the MACD line cracks through from underneath, you can use the buy signal. So, the MACD indicator is the best for forex traders to get accurate trading signals.
- The Stochastic Oscillator
The stochastic oscillator is another essential indicator in forex trading that indicates the possible closing time in a trend. Plus, it also denotes the oversold and overbought signal. George C. Lane developed the stochastic oscillator in the 1950s. Like the relative strength index, you will find a 0 to 100 scale in the stochastic oscillator indicator.
When the stochastic line stays above the 80s, that means this line stays above the red dot line; then, the market is in an overbought situation. On the other hand, when the stochastic line remains under the 20s or under the blue dot line, then the market is in an oversold condition. You also noticed that, when the market is in an oversold condition, this time is suitable for buying, and in an overbought condition, you should sell.
The stochastic indicator also gives you information about accumulation and distribution in the trading market. The accumulation occurs when the market shuts down near the stochastic high values, and it also suggests buying. In contrast, the distribution occurs when the market shuts down near the stochastic low values, and it also suggests you sell.
Using only one indicator may not always provide you the proper signal. That’s why you should combine the multiple forex trading indicators for getting the updated information.
- Bollinger Bands
In the 1980s, John Bollinger created this technical analysis indicator—Bollinger Bands, that provides the proper trading signal. Traders use this indicator for observing market volatility. In a Bollinger bands chart, you will find three lines which are the upper band, middle band, and lower band. The lines are within the boundaries when the price stays at 85%.
The middle line of a Bollinger band chart indicates the simple moving average for the default value of 20-period. When the price stays under the middle band, it indicates a downtrend. In contrast, when the price remains above the middle band, then it refers to the uptrend.
You also noticed by this chart that the price moves upward and downward. According to this current price movement, you can identify the possible future price movement. When the indicator indicates the upper line, this time is favorable for selling, and a good buying time comes when the price denotes the lower line.
Moreover, different indicators provide the currency movements signals in various ways. The best forex indicators will give you the best profit. Therefore, you should use the best indicators for your forex trading platform. If you always get the proper signal from your indicator, you should be able to make the right decision, and your trade will be Profitable.