In this article, we will discuss the most important things to know about top Forex indicators to generate profitable buy and sell signals. Our ultimate guide to technical indicators will explore what are the best forex volume indicators and forex trend indicators. We’ll start from the basics and then reveal the best and most important forex indicators for traders. In addition, we’re going to show how to develop your forex strategies based on indicators.
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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 currency market needs to move up or down after your order is triggered, otherwise, you won’t have the chance to make any profits. That’s the reason why a good forex trend indicator is indispensable. Fortunately, we're here to help.
Technical indicators make it easy for you to identify current price trends and predict where prices will move in the future. By developing the best forex indicator strategy, you can increase the amount you earn each trading day.
If you’re new to the forex market please check our Forex Trading for Beginners’ Guide that covers all the information you need on how you can start FX trading.
Let’s start by defining what a Forex indicator is
Forex Indicators Explained
Forex indicators are simply tools used in the technical analysis process to forecast future price movement. A technical indicator uses a rigorous mathematical formula based on historical prices and/or volume and displays the results in the form of visual representation, either overlaid on top of the price or at the bottom of your chart window.
If properly used, technical indicators can add a new dimension to understanding how the price moves. The best trading strategies will often rely on multiple technical indicators. It’s well known that many traders, especially novice traders use technical indicators as their primary tool in analyzing the price movement.
Basically, these technical indicators are used to support your price chart analysis. Most Forex trading platforms should come with a default set of the most popular technical indicators. To find a fx platform, we recommend the forex trading platform section of Compare Forex Brokers.
There is also a hidden danger that you need to be aware of, which we call: Analysis Paralysis. In other words, you need to be careful not to fall into the trap of using too many technical indicators that ultimately can affect your ability to properly analyze the market price.
The FX indicators are very useful in analyzing a price chart. If you don’t know how to start using FX indicators please check: How to Apply Technical Analysis – Step-by-Step Guide.
Let’s now see what are the different types of Forex technical indicators and how to correctly use them.
How Many Types of Forex Indicators Are?
There are countless technical indicators available to choose from. In technical analysis, most Forex indicators fall into one of the three categories, as follows:
- Leading Forex indicators (Parabolic SAR, RSI, Stochastic)
- Lagging Forex indicators (Moving Averages)
- Confirming Forex indicators (On Balance Volume)
You have to take the necessary time and learn the meaning of each technical indicator. No indicator will give you a 100% win rate, so don’t be the one chasing fairy tales. This is why many traders use multiple indicators. Taking a closer look at the market will help you succeed as a trader.
What is the best technical indicator in forex?
Here is a method to improve our chart reading skills and learn what FX indicators to use and how to combine them: Best Combination of Technical Indicators – Market Maker Methods.
Additionally, the FX technical indicators can be arranged according to the type of data we extract from them. We can identify four types of indicators to understand the market:
- Forex momentum indicators (RSI, Stochastic, CCI, Williams %R)
- Forex trend indicators (Moving Averages, MACD, Parabolic SAR)
- Forex volatility indicators (Bollinger Bands, Envelopes, ATR)
- Forex sentiment indicators or FX volume indicators (OBV, Chaikin Money Flow)
A leading technical indicator gives early warnings and trade signals of where the price is going to move. So, it can determine in which direction to trade before the new trend has even started.
This sounds too good to be true and you’re right if you’re skeptical.
If leading indicators are able to signal trades in advance, before the trend has started, then we all would be extremely rich by now, which is not the case. The downside is that leading indicators are infamous for their many false signals.
This means that a lot of the time they will mislead you in the wrong direction.
In the example above, we have the EUR/USD with the RSI indicator showing overbought conditions in the market. Despite the RSI overbought reading the EUR/USD continued to rally because the prevailing and the dominant trend were still up. A novice trader probably would have sold once the RSI entered in overbought territory, which would have caused him to lose money. With experience, the trader will learn to time their entries and exits with a sense of precision.
Note* Technical indicators are not perfect, but if they are correctly used for their strength and in the context of a trend framework great things can be accomplished.
A lagging technical indicator, as its name suggests, is delayed from the current market price. Usually, the lag is caused by using bigger price data inputs in their calculation. But, a lagging indicator can be extremely helpful in gauging the market trend.
The whole idea of using a lagging indicator for trend determination is that they remove a lot of the market noise that is inherited in the price and gives you a much better idea of the trend. But, the downside is that a lagging indicator will only alert you about a trend after the trend has started.
That’s not that great because many times, this means you’ll be too late to the party and secondly, the later you enter in the direction of the trend the less profit margin will be available to you. In this case, by using a lagging indicator to trade you miss a good part of the potential profit.
The classic moving average crossover system is a good example of how lagging indicators signal the shift in market sentiment after the new trend has started (see Forex chart below).
Note* we have to keep in mind that most technical indicators are lagging in nature.
A confirming technical indicator can be extremely useful to validate your price analysis. As its name suggests, confirming indicators are only used to confirm that reading of price action is correct. One of the most popular confirming indicators is the On Balance Volume – OBV. Volume indicators are incredibly useful.
The way one will use and interpret the OBV readings is quite simple. What drives the trend are buyers and sellers and their aggressiveness and in this regard, the volume should increase when the market moves in an uptrend or in a downtrend.
In the example below, if for whatever reasons, you would conclude that the uptrend will reverse, then by using the OBV indicator it would have confirmed your analysis. The uptrend was lacking momentum as buyers were not buying this uptrend as indicated by the OBV indicator.
Understanding the differences and the similarities between the three types of technical indicators can help you better read the information they provide and then decide how to trade. The best trading indicator for you will depend on your trading goals.
In addition, you can also use functional indicators like for example, the Forex bar timer indicator. The candle timer indicator simply counts down the time until the next candle opens. It’s simply a functional tool used by many professional traders to gauge the price chart.
Now, let’s explore what is the most important Forex indicator of all times.
How to Use Forex Trend Indicators
The FX trend indicator 200-day moving average is considered to be the best trend indicator out there.
For example, if you were looking at a 200-day Moving Average. What are you going to be plotting on your chart is a moving point that looks at the last 200 closing prices and then plots the average price. This way you can eliminate a lot of the noise that is inherited in your price chart and gives you a much simpler view of what is going on in the market.
A moving average is really an easy way to identify and provide a little bit of definition to the trend. This should give you the answer of whether you’re in an uptrend or in a downtrend and how solid is that trend. Because a moving average can gauge the trend direction they are also called a trending indicator (see Forex chart below).
The slope of the moving average and where the price is in relationship to the MA will dictate the trend direction.
The second most important technical indicator is the Forex volume indicator.
How to Use the Best Forex Volume Indicators
The Forex volume indicators are used as a confirmation tool to confirm the trend. Moreover, the volume indicator is so versatile that it can also be used to confirm a Forex breakout. Identifying breakouts will allow you to trade ahead of the market.
The volume indicators can help us better understand how healthy and secure the trend is. A volume-based indicator will typically be displayed at the bottom of your chart and many of them come in the form of some kind of oscillators. Most oscillators will have an upper and lower barrier that will usually signal buying and selling pressures.
Looking for the best forex volume indicators strategy? Your hunt is over. Check for yourself the FREE Volume Trading Strategy to Win 77% of Trades.
We’ve also promised that we’re going to show you what Forex breakout strategy indicators you need to trade Forex breakouts.
Forex Breakout Strategy Indicators
How to put the odds in your favor when trading breakouts?
A breakout is probably the most visible and common chart pattern. They also create excellent opportunities for profits. Most trends emerge out of a breakout of consolidation. The high frequency in which a breakout pattern happens makes the breakout more prone to give false signals. Using a technical indicator to confirm a Forex breakout is vital if you want to distinguish between a false breakout and a genuine breakout.
If you want to learn how to use the forex breakout strategy indicators please see some of the best trading tactics used to trade breakouts by professional traders: Breakout Trading Strategy Used by Professional Traders.
What makes a breakout valid is whether or not the FX breakout occurs as a result of smart money activity. So, to assess the breakout we really need to use a volume indicator to measure the buying and selling activity by the professionals.
One volume-based indicator is the VWMA (Volume Weighted Moving Average).
The VWMA is one of the most underrated technical indicators only professional traders use. VWMA looks like a moving average, but instead, it is based on volume. It’s not just a price based moving average.
Final Words – Forex Trend Indicators
Forex indicators can be extremely useful if you keep it simple, but it can get problematic if it gets too complicated. Be sure to fully understand whichever forex indicators you choose to use. Certain technical indicators can be of great help to read the price action and what is more important it can help you forecast future price movement. However, before adventuring yourself into the world of Forex technical indicators you have to remember that the price still remains the ultimate truth-teller about what is really going on behind any chart.
Each indicator has its own strength. On the one hand, Forex trend indicators are more useful to determine the general direction of the market. At the same time, some of the best forex volume indicators can be used more for confirming the strength of the trend. Read about the best forex strategies here.
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