Forex indicators are useful in a number of ways. They function as tools that are embedded in trading platforms and connected throughout in order to offer traders a different – and often more concise – perspective on the market. They can offer long or short-term forecasts, a view on the current state of a currency pair, or a look back at historical data. There are actually quite a few different Forex indicators that are of use, several of which are detailed below.
What indicators are the best?
Many traders out there have their favorite technical indicators, and these indicators become part of the standard strategy of those traders. Regardless of what you may hear, there really is no better indicator because the style, personality and psychology of each operator are different; therefore, the indicators that each operator uses will be different. With that said, there are some must-have indicators when it comes to technical analysis.
Moving averages are leading technical indicators specifically designed to identify breakouts in price actions, as well as the general direction of the market. They take the form of a line drawn on a chart that is used to measure the average – or average – value of a Forex pair over a specified time, such as 14 days or 200 days.
This gives the trader an overview of the general trend of the currency pair , but it should be noted that moving averages over a shorter period of time will have a faster reaction to price changes occurring in the market.
- Moving averages – especially simple moving averages, tend to be a more stable indicator than other analysis tools.
- In general, moving averages are more beneficial for traders who work with longer time frames, such as position traders.
- Moving averages are based on historical data, which means that they are slower to respond to rapidly changing market conditions.
- Traders working with shorter time frames may have trouble getting meaningful information from a simple moving average. An exponential moving average may be preferable.
Forex oscillators indicate when the market reaches a limit and an opposite correction from the current trend becomes the likely outcome. For example, when a price is too high, analysts say it is overbought which means that the price will remain stable or slide a bit as traders work to improve their profits. When a negative correction occurs, new entrants enter the market, raising the price. On the other hand, an oversold market causes the reaction of the other direction or a positive correction. Typically, it is better to buy the Forex pairs that are oversold and sell the overbought ones.
- Oscillators are leading indicators, helping traders identify trends and opportunities before a price move occurs and maximize their profits.
- Oscillators provide valuable information on market speed and momentum – regardless of currency price or trading volume.
- Like any leading indicator, oscillators are not infallible. False signals occur.
Stochastic oscillators are designed to indicate zones of oversold and overbought conditions, but stochastics also signal possible price reversals. There are multiple versions of stochastics but slow stochastics remain the most commonly implemented. Located at the bottom of a chart, it is made up of two moving averages restricted between 0 and 100 .
- Stochastics are easy to understand and offer clear trading signals, making them a beneficial indicator for inexperienced traders.
- Often the signals develop on a single Forex chart, creating numerous opportunities for traders to consider.
- Stochastics have a tendency to produce false signals.
- Sometimes the time frames for the use of the stochastic oscillator are extended too long for day traders and speculators who can limit the value of the indicator for shorter trading time frames.
Fibonacci series lines
A part of an entire set of tools based on the Fibonacci sequence, the Fibonacci series lines are a method of technical analysis that seeks to find support and resistance levels on a trading instrument. The concept is simple: markets react or retreat by smaller portions of a larger move, and these portions are predictable. So the Fibonacci series is a cycle of patterns that are continuous. Investors using this method use the Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent to place losses or determine target prices.
- Because the Fibonacci series is an integral part of Forex trading evaluations, prices have an inclination to undergo extensions and the series generally align with this theory.
- The Fibonacci series has a long history in Forex trading and many successful investors over the decades vouch for its value as a trading analysis tool.
- Unlike other technical indicators, the Fibonacci series involves a subjective assessment. Critics argue that these retracement levels are so universally used that they become a self-fulfilling prophecy, with price movements dictated by investors anticipating the influence of Fibonacci levels.
- Although widely regarded as a useful tool among many investors, the Fibonacci series is not based on mathematical logic or economic theory; rather, it has developed on the basis of common proportions observed in the natural world.
Relative Strength Index (RSI)
Like stochastics, the Relative Strength Index – commonly listed as RSI – is an oscillator used to find conditions in the market that are either oversold or overbought. This is particularly useful for investors who like to buy low and sell high because the values are plotted between zero and 100. Zero is considered oversold while 100 is considered overbought.
- RSI is an easy-to-use indicator, and investors can set RSI alerts that notify them when the value of a currency pair reaches a certain threshold.
- RSI is known for giving false signals, so it is best used as a starting point for trading evaluations – when investors receive an RSI notification, then they can begin a more thorough evaluation of the potential trade.
- The RSI is less reliable when used to evaluate currency pairs that involve volatile markets.
A volatility channel that usually appears on charts detailing Forex indicators, Bollinger tapes are a simple idea and therefore widely used. If the price of a currency pair exceeds a moving average, plus a certain amount, it indicates the start of a trend. Bollinger tape values are generally two or 2.5 standard deviations from a simple moving average.
- The width of the Bollinger ribbons offers an easy visual representation of volatility in the market: a wider distance between the two outer ribbons reflects higher market volatility, while a reduced distance reflects consolidation that could lead to a break price. .
- Bollinger tapes are a reflection of past performance , which can make it difficult to use to identify trading opportunities early. This makes Bollinger tapes more useful when paired with other technical indicators.
Indicators can do a lot for an investor: simplifying price information, providing trend signals, warning about investments, and more. There is an indicator for each time frame and there are variables that can be changed and adjusted according to the investor’s preference. Each investor is unique, and each indicator can be used in a variety of ways. A single indicator will rarely be a perfect signal, but considering a range of indicators can often put you on the right side of the Forex markets.