What Are Forex Indicators?
So you have decided to take your forex trading to the next level. What is the next step for you as a trader? Any trader who profits from the market knows that in order to improve the chances of profitable trades on any market, including forex markets, you need information to predict market movements and actions.
When it comes to such information in trading, many experts, brokers, traders, both day traders and sporadic traders, agree on one point; and that is the fact that forex indicators are the most vital weapons you have in the battle to extract money from foreign currency exchange.
In the matter of forex indicators, there are many things to keep in mind when choosing the best indicators, since there are numerous indicators. Each of these indicators might be suitable for your current situation but not for another. So, with careful consideration and opting for the right indicator, the correct analysis of the market through that indicator will lead to higher profits both in short term and long term trading.
How Many Forex Indicators Are There?
No matter where you trade, whether it is the more well-known platforms such as MetaTrader 4 or even MetaTrader 5, or other lesser known platforms, as a trader you need to analyze market data carefully to see the probability of a past pattern being repeated and, in general, to be able to predict with a certain degree of precision that you can rely upon, how the market will perform in the near or distant future.
As it was touched upon earlier, there are various ways to analyze the market data and gain such knowledge over possible patterns; one of these ways are forex indicators.
Forex indicators examine certain data such as the historical price data of different currency pairs, the currency price, the trading volume over a certain period of time, usually 24 hours, and the general performance of the market, among others, in order to calculate where prices might be headed or so-to-say give an indication to the trader.
When the indicators light up the correct patterns for the forex traders, then they will be able to make decision in order to buy or sell with a certain trading pair in order to make maximized profits.
No matter whether it is your thousandth trade or first one, it is always prudent to implement the best forex trading indicators before making a decision.
There are many different indicators for the forex markets and it might be a little bit confusing to choose the “correct” one for your situation. So, in this article we want to show you the main types of forex indicators first, to give you a general idea of what these indicators can tell you. And then we will show you all the different types of actual indicators and what they can do for you.
Main Types of Forex Indicators
In action and in the heat of trading, indicators can take many different types and execute many different roles. However, in general, forex market indicators can be divided into four major categories.
1.Trend Indicators
This type of forex indicators provides the most important type of data to the traders, since they are directly related to prices and where they are headed. However, a point of caution when using such indicators is to keep in mind that they only provide a general trend and not an exact route for the upcoming price changes. Yet, with careful consideration these indicators can yield reliable profits with any forex trade.
2.Volume Indicators
One of the most important data in any market has to do with the market volume or the general trading volume of an asset or pair of currencies usually over a day or even longer. By depending on volume analyses Forex traders can detect the market behaviors and trader behaviors to see if a currency or currency pair is going to trend up or down in a market based on the sale and purchase percentages. This is exactly the type of information that forex volume indicators can provide for you.
3.Volatility Indicators
Among other market information that is crucially important in making correct decision, especially when executing certain trading strategies in forex such as scalping, is the volatility in the market. Such information becomes vitally important to take into account when a certain trend cannot be detected in the market, or at least not one that can be generalized, because there is serious price volatility. This usually happened when the forex market or even one foreign currency pair is shocked and cannot settle on its resistance or support level and oscillates heavily. With the help of volatility indicators, a forex trader will be able to detect the oscillation and make profits as a result of these ups and downs in the price over a short period of time, such as a day.
4.Momentum Indicators
The last type of forex indicators provides information to the traders with regard to market and price momentums. What it means is that traders can see how powerful and strong a certain movement has been, notwithstanding whether it was a positive or negative price movement. The importance of momentum indicators in forex trading is that the traders also need to know how long a certain trend will last as a result of the strength of its momentum. Therefore, other than obtaining information with regard to the trading price trend, you also need to consider the momentum of the movement. Because otherwise you might close your position to early and gain less profits or worse yet, you might keep a certain position open longer than it should be and occur losses.
Here is the million-dollar question: which one of these forex indicators should you opt for the next time you want to trade in a forex market or with a forex broker? The answer is an amalgam of these indicators.
The reason is that at any one point in trading more than one indicator might be useful for you. It means, no professional trader uses only one indicator. When in fact they implement a combination of indicators in order to yield the best results and most profits.
Different Types of Forex Technical Indicators
Now that you have a basic knowledge of what forex trading indicators are and how they can actually help you in trading, let us take a look at actual indicators, what they are, what they do, and how you can benefit from them in your trades, literally!
| Forex Indicators |
| Fibonacci Indicator |
| Moving Average (MA) |
| Bollinger Bands |
| Average True Range (ATR) |
| Moving Average Convergence or Divergence (MACD) |
| Relative Strength Index (RSI) |
| Parabolic Indicator |
| Chaikin Money Flow (CMF) |
| Pivot Point |
| Stochastic |
Fibonacci Indicator
We are going to start with what is perhaps the most famous forex price indicator; that’s right, the renowned Fibonacci.
First and foremost, Fibonacci is the name of a sequence of numbers that was first introduced by the Italian mathematician with the same name of course. The sequence begins with a zero, followed by a one, and then after that each number in the sequence is an aggregate of the two previous numbers; as such the following sequence can be made: {0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, …}
Numerous trading experts are of the opinion that the trend of the Fibonacci numbers provide valuable information in forex trading an in detecting market patterns for the most lucrative foreign currency exchange.
The Fibonacci Indicator is a technical analysis tool that uses horizontal lines to identify possible levels of support and resistance in an asset’s price action. These levels are derived from the Fibonacci sequence, which is a series of numbers in which each number is the sum of the two preceding ones (0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on). In technical analysis, the most commonly used Fibonacci ratios are 0.236, 0.382, 0.500, 0.618, 0.764, and 1.000.
In fact, recently, an extracted number based on the Fibonacci sequence has gained quite the fame. This number, which is actually a ratio, is known as the Fibonacci Golden Ratio.
The Golden Ration is derived based on the ratio of the numbers within the sequence itself which equals to 1.618.
The Fibonacci numbers and also the Golden Ratio are used in various ways in analyzing the forex market. But one of the most prevalent analyses based on this sequence is known as the Fibonacci retracement indicator.
In order to execute the Fibonacci retracement indicator, two high and low points of an asset or foreign currency exchange pair are required. Then in the space between these two highs and lows, the Fibonacci numbers are extracted, usually in the form of percentages.
This indicator will allow forex traders to find out whether the price trend is going to have a deep pullback or not and how deep this pullback will be.
This is only one technical price analysis that is carried out with the help of the Fibonacci sequence, there are others that can likewise help forex traders in their quest to trade foreign currencies and make money.
Moving Average (MA) Indicator
Moving average or MA is considered to be among the most applied price indicators in forex markets by traders. The moving average provides a certain formula to the trader, with the help of which the trader will be able to extract average prices and average performance of an asset or trading pair over a period of time.
The average provided by moving average indicator is usually long term and not in terms of days; so ordinarily that would be weeks or even months.
Knowing the price movement averages can help you predict possible future movements with ease and determine how long a certain movement, whether upward or downward, would normally last in a certain market.
There are of course many reasons why moving average (MA) indicator is quite useful for any forex trader, but one of the reasons is that this indicator can provide a big picture of the market. One of the issues that traders have in the analysis of market movement and price actions is the fact that they might get tunnel vision, i.e. getting too drowned in a small time period that they are not able to pick the general patterns.
The Moving Average (MA) Indicator is a technical analysis tool used to smooth out price trends by averaging the price of an asset over a specific time period. It is commonly used to identify support and resistance levels and to determine the overall trend direction. Short-term moving averages are more sensitive to price fluctuations and are used for identifying short-term trends, while longer-term moving averages are more suited to identifying long-term trends. Common periods used for moving averages include 50, 100, and 200 days.
This is exactly what moving average provides for forex traders. With a general and average price or movement of a market, they can make better decision with regard to opening and closing positions that can result in profits.
Another reason why moving average has time and again proven to be successful for numerous traders is the ability this indicator gives to the traders in predicting a more reliable upcoming pattern in the forex market or even with a certain foreign exchange pair in the forex market. Because then based on that prediction, you implement various trading strategies, such as even arbitrage and make profits.
Bollinger Bands Indicator
Much like other technical indicators, Bollinger bands get their names from their creator. These technical indicators were first introduced in the beginning of the 1980s by renowned economist John Bollinger. Since then, Bollinger bands have become some of the most widespread technical indicators in all financial market and of course forex.
Bollinger bands can provide information to the forex traders with regard to which trading pairs or foreign currencies have been overbought or oversold. In this analysis, overbought is when buying continued after the price hits the Bollinger band’s higher limit and overselling occurs when the selling continues after the price reaches the lower boundaries of the Bollinger bands.
In fact, the Bollinger bands indicator does not just have two bands. In actuality, this indicator consists of three bands applied to a certain period of the analysis chart. The middle chart is known as the 20-period average. Then based on this moving average, the higher and lower limits of the Bollinger bands are drawn.
Also read: Forex chart definition
Bollinger Bands is a technical analysis tool that consists of a simple moving average (usually over 20 periods) and two bands that are placed above and below the moving average. The distance between the bands is based on the standard deviation of the price over the same period used for the moving average. The bands expand and contract based on the volatility of the price, which means they can be used to identify periods of high or low volatility. Traders often use Bollinger Bands to identify potential buy and sell signals when the price crosses above or below the upper or lower band, respectively. The indicator can also be used to identify potential support and resistance levels, and to determine the strength of a trend.
Other than indications of overselling and overbuying in certain forex markets, Bollinger bands are also able to indicate price volatilities. Should the price movements be too sudden, then the bands will enlarge, indicating high price volatilities, since there is a lot of space between the three bands. On the other hand, should the price volatility be low, then the bands will contract and the distance between them will be less, thus informing the trader that there is less volatility in the market.
These are some of the general indications that Bollinger bands can provide forex traders. Of course Bollinger bands can provide much more indications and also strategies based on such technical analysis of the forex market.
Average True Range (ATR) Indicator
Each of these forex indicators can show traders different information with regard to market movements and prices. Average true range or ATR can indicate market volatilities to traders.
The way Average true range indicator can show volatility is that it measures how much on average a certain asset or trading pair in forex market has changed in a certain period of time.
The Average True Range (ATR) Indicator is a technical analysis tool that measures the volatility of an asset by taking into account the range of price movements over a specified period. The ATR is calculated as the average of the true range over the selected period, where the true range is the highest of the following values: the distance between the current high and low, the distance between the previous close and the current high, or the distance between the previous close and the current low. The ATR value can be used to set stop loss and take profit levels, as well as to identify potential changes in trend or momentum. Higher ATR values indicate higher volatility, while lower ATR values indicate lower volatility. The ATR is commonly used in conjunction with other technical indicators to improve trading decisions.
But how will knowing market volatility help you as a forex trader? First of all, being aware of the average amount of volatility in a trading pair for example can help you locate your most lucrative profit targets. Additionally, if you know the volatility of a foreign currency you can determine what your stop loss should be to maximize profits and minimize losses.
Another peculiarity of this technical indicator for forex market is that normally average true range is shown in terms of dollars, but in forex market it is shown in terms of pip amounts.
Moving Average Convergence or Divergence (MACD) Indicator
All of these indicators are tools to help forex traders predict as precisely as possible how the market will react in upcoming trades that you want to execute. Moving average convergence or divergence, otherwise titled MACD, is one of the technical indicators that can help traders predict future patterns very well.
But what do convergence and divergence mean in forex markets?
Let’s start with divergence. In forex markets, divergence happens when the price of an asset moves contrary to the market movements and market momentum; i.e. they move in divergence with each other. For example, imagine market momentum is indicating an upward trend, while the price of an asset is seemingly falling. This means that the price drop is against market momentum. So, the technical indicator for that asset might very well face a reversal soon. As a result, in this situation it might not be prudent to lock in your buying position or refrain from selling as prices might follow market momentum and reverse toward an upward trend.
The Moving Average Convergence or Divergence (MACD) Indicator is a technical analysis tool that is used to identify changes in momentum and trend direction. It is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. A 9-period EMA is then plotted on top of the MACD line to act as a signal line. When the MACD line crosses above the signal line, it is considered a bullish signal, and when it crosses below the signal line, it is considered a bearish signal. Traders also use the distance between the MACD line and the signal line, known as the MACD histogram, to identify changes in momentum. A positive MACD histogram indicates bullish momentum, while a negative histogram indicates bearish momentum. The MACD is often used in conjunction with other technical indicators to confirm signals and improve trading decisions.
On the other hand, convergence is when the price of a currency in the forex market converges with the market momentum; i.e. they move in convergence with each other. An example for convergence can be when again market momentum is showing an upward trend and at the same time the technical indicator for the asset is also indicating a positive trend. In all likelihood, this could mean that prices will keep increasing since they move in accordance with the market momentum. So, in this situation it might be more profitable to refrain from selling since prices can potentially rise higher.
Relative Strength Index (RSI) Indicator
A relative strength index or RSI will show the market momentum to the forex trader. In this indicator, the speed and scale of an asset’s price changes are taken into account in order to estimate whether it has been valued under or over what it should have been.
This indicator will show the momentum in the form of a line graph, which is also known as an oscillator in the forex technical analysis. This oscillator will move between 0 to 100.
The Relative Strength Index (RSI) Indicator is a technical analysis tool that measures the strength of an asset’s price action by comparing the magnitude of its recent gains to the magnitude of its recent losses. The RSI is calculated as a ratio of the average gain to the average loss over a specified period, which is then normalized to a scale of 0 to 100. A reading above 70 is considered overbought, while a reading below 30 is considered oversold. Traders use the RSI to identify potential trend reversals, as well as to confirm buy and sell signals from other technical indicators. The RSI is often used in conjunction with other technical indicators, such as moving averages or Bollinger Bands, to improve trading decisions.
The RSI (relative strength index) shows whether an asset in the forex market was overbought or oversold, and thus it is also able to indicate possible reversals or pullbacks in the price of a foreign currency or trading pair.
Therefore, forex traders can use the relative strength index to decide what is the prime time for buying or selling a certain trading pair in forex markets.
Parabolic Indicator
The parabolic forex indicator, which is also known as parabolic stop and reverse or SAR, was also developed in the 1980s. The parabolic indicator is used to determine price stops when it comes to both long and short positions in a forex market.
As such, the parabolic is used in order to place stop orders in different positions.
The Parabolic Indicator, also known as the Parabolic SAR (Stop and Reverse) Indicator, is a technical analysis tool used to identify potential trend reversals in the price of an asset. The indicator is represented by a series of dots that are placed above or below the price of the asset, depending on the direction of the trend. When the dots are below the price, it indicates a bullish trend, and when the dots are above the price, it indicates a bearish trend. The Parabolic SAR is calculated based on the previous period’s price action, and is designed to provide traders with a trailing stop loss, which can be used to protect profits or limit losses. The Parabolic SAR can also be used to identify potential entry and exit points for trades, although it is recommended to be used in conjunction with other technical indicators for confirmation.
In terms of what the parabolic indicator means for a forex indicator, we can consider the familiar candle sticks on a chart. Now, when the parabolic indicator is below the candle sticks, it of course indicates an upward or bullish trend. So, in this situation the parabolic indicator tells us that we can go for the long position, given the trend of the market. On the other hand, when candles are below the parabolic indicator, it means of course the market is on a bearish trend. And in this situation the parabolic indicator is helping to realize it is time to pull out of the market.
This is how generally it is believed that the parabolic SAR can help you place your stop positions.
Chaikin Money Flow (CMF) Indicator
Now, this is a rather interesting indicator, since the type of information a Chaikin money flow oscillator provides is different in nature compared to other indicators. The Chaikin money flow or CMF is used in order to measure the volume by which money flows in the market during a specific period of time. In other words, it calculates the pressure of buying and selling that is defined as institutional pressure.
It is however, much like relative strength index (RSI), a momentum indicator in essence, which means that it tends to show the overall trend of an asset or trading pair.
The Chaikin Money Flow (CMF) Indicator is a technical analysis tool used to measure the flow of money into or out of an asset. The CMF is based on the Accumulation/Distribution Line (ADL), which is a cumulative indicator that takes into account the volume and direction of price movement. The CMF is calculated by multiplying the ADL by the volume over a specified period, and then dividing the result by the sum of the volume over the same period. The CMF value can range from -1 to +1, with values above 0 indicating buying pressure and values below 0 indicating selling pressure. The CMF is often used to identify potential trend reversals, as well as to confirm buy and sell signals from other technical indicators. Traders may also use the CMF to identify potential entry and exit points for trades.
The oscillation range of the Chaikin money flow is between 1 and -1, however it does ordinarily remain between 0.5 and -0.5 in most cases. Furthermore, the way these figures related to the Chaikin money flow are interpreted is that any number above zero can be regarded as an indication of a bullish market, meaning market has an upward trend, and any number below zero can be regarded as an indication of a bearish market, pointing to a general downward trend in the market.
Pivot Point Indicator
If you ask any forex trader who has experience trading foreign currency pairs long enough, they will tell you that two pieces of information known as support and resistance levels are among the most crucially important data.
Pivot point indicator is one of the ways that can help provide traders with support and resistance levels that could potentially manifest in the chart in actuality. This indicator along with other indicators and tools derived from the pivot point can contribute to alleviating the threat of loss by risking for forex traders.
The Pivot Point Indicator is a technical analysis tool used to determine potential levels of support and resistance for an asset’s price based on its previous high, low, and close prices. Pivot points are calculated using a simple formula that takes the average of the previous high, low, and close prices. The resulting value is then used to calculate three levels of support and three levels of resistance. These levels are referred to as the pivot point, first resistance, second resistance, third resistance, first support, second support, and third support. Traders often use pivot points to identify potential levels for buying and selling, as well as to set stop loss and take profit levels. The pivot point indicator is often used in conjunction with other technical indicators to improve trading decisions.
Pivot point indicator thus enables forex traders to pinpoint the prime time to enter the market and along the same lines the most appropriate time to stop.
Stochastic Indicator
Last on our list of forex trading indicators is the stochastic technical indicator.
Stochastic indicator is yet another momentum oscillator. It shows forex traders where potential points of reversals in the trends might be, which are of course derived from the line graph of the stochastic oscillator.
The way it measures momentum is through the comparison of the closing price to the average of the trading price during a certain period of time. In other words, the measurement of the momentum is also done by comparing the price as it is with the past price of the asset, which is otherwise called a lookback.
The Stochastic Indicator is a technical analysis tool used to measure an asset’s momentum and identify potential trend reversals. The indicator is based on the assumption that as an asset’s price approaches its high or low point, its momentum will slow down or reverse. The Stochastic Indicator consists of two lines: the %K line and the %D line. The %K line is calculated by comparing the current closing price to the range of prices over a specified period, and then multiplying the result by 100. The %D line is a moving average of the %K line over a specified period. The Stochastic Indicator value ranges from 0 to 100, with values above 80 indicating overbought conditions, and values below 20 indicating oversold conditions. Traders use the Stochastic Indicator to identify potential trend reversals, as well as to confirm buy and sell signals from other technical indicators. The Stochastic Indicator is often used in conjunction with other technical indicators, such as moving averages or Bollinger Bands, to improve trading decisions.
The stochastic oscillator is also very similar to the relative strength index (RSI), and of course as it was mentioned, in a similar fashion the stochastic oscillator also belongs to the group of forex technical indicators known as momentum oscillators. It means, such indicators analyze the rate by which price changes.
Conclusion
So now you know the meaning of forex indicators, how many different types of trading indicators can be used by forex traders, and what type of valuable information these technical indicators can provide with regard to market movements and exchange pair prices. With the correct application of the right indicators, any forex trader can analyze the market correctly and attain a reliable pattern for trading price and other patterns, all of which translates into more profits from your forex trades.
