Top Technical Indicators in Forex
Technical indicators provide traders with the support and resistance price levels that in turn help in placing successful entry and exit orders. By carefully analysing the present and past performance of a currency pair, technical indicators make it easy for you to predict future performance. In this article, we will learn everything about technical indicators:
What are technical indicators?
Technical indicators are a market direction signal based on the current and historical price movement of a currency pair that provides traders with future price expectations. They are pattern-based signals that form different shapes to reflect the open, high, close and low currency pair prices and future market direction.
Types of technical indicator:
-
A leading indicator uses a short-term timeframe to predict future prices and the future market directions. The Stochastic Oscillator, Fibonacci retracement, and Parabolic SAR are some of the most popular leading indicators.
-
A lagging indicator uses the historical price movement to tell traders what the previous market trend has been. It provides reversal signals to determine the next trend. Moving Averages, Bollinger Bands, and MACD are some of the most popular lagging indicators.
How do technical indicators work?
Technical indicators provide traders with a technical analysis of a particular currency pair that evaluates the price movement and identifies successful trading opportunities accordingly. Technical analysis is a methodology to find out future market prices with the help of current and historical market data. Technical indicators put a major focus on current, previous and expected price movements, charting tools, and other trading signals that evaluate the strength or weakness of a currency pair’s trend. It uses mathematical formulas to derive data points that are calculated from the trading volume, historical price and opening price of the currency pair.
Example of a technical indicator
Let us assume that you are trading EUR/USD, and you want to understand the future price direction of the same. Using the Simple Moving Averages will provide you with the expected market movement through current currency pair prices. You will consider one short-term and one long-term moving average to compare and confirm the future trend.
- The 50-day short-term moving average (MA) takes the sum of the currency pair price over the last 50 trading days and divides it by 50
- The 200-day long-term moving average takes the sum of the currency pair price over the last 200 trading days and divides it by 200
When the 50-day MA is more than the 200-day MA, it provides traders with an uptrend signal as it tells them that the currency pair prices in the last 50 days have been strongly trading upwards. If the 50-day MA is less than the 200-day MA, it means that the currency pair prices in the last 200 days have been slightly on the downward side, and hence it signals traders about an expected downtrend.
Top technical indicators you should know
Trend indicators
Trend indicators measure the strength and trend direction of a particular currency pair. It does so by averaging the currency pair prices through the historical prices to establish a single value, based on which current prices can be compared to one another.
- When a trend indicator signals current prices above the moving average price, it indicates an uptrend
- When a trend indicator signals current prices below the moving average price, it indicates a downtrend
1. Moving Averages (MA)
A Moving Average is one of the most widely used technical indicators that provide traders with an average currency pair price based on the historical price trends of the same. It determines the long-term market movement and helps traders identify future market trends and place trade orders successfully.
- When the Moving Averages signal an uptrend, it provides ideal buy/entry price levels in the market
- When the Moving Averages signal a downtrend, it provides ideal sell/exit price levels in the market
2. Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (MACD) is an indicator that signals future market trends through a crossover. It establishes the relationship between one long-term and one short-term moving average price of a currency pair. This relationship helps traders identify if there is a bullish or bearish trend in the market. It comprises of –
- An MACD line which is calculated as the difference between the 26-period EMA and 12-period EMA
- A signal line which is the 9-day EMA of the currency pair
When the MACD line crosses the signal line from above, it indicates a bullish trend and provides ideal entry levels. When the MACD line crosses the signal line from below, it indicates a bearish trend and provides ideal exit levels.
Momentum indicators
Momentum indicators determine how strong or weak a trend is. It identifies the speed of currency pair price movements by comparing historical prices with current prices. The more is the momentum of a particular currency pair, the more volatile it is considered to be and vice versa.
1. Relative Strength Index (RSI)
Relative Strength Index (RSI) is an indicator that tells about the overbought and oversold levels in the market. It oscillates between 0 to 100, where readings above 70 indicate oversold market conditions and readings below 30 indicate overbought market conditions. It helps understand in which direction the market is going to reverse.
- When the market is oversold, it signals traders to enter the market due to an expected uptrend
- When the market is overbought, it signals traders to enter the market due to an expected downtrend
2. Average Directional Index (ADX)
The Average Directional Index (ADX) indicator is an average of the increasing currency prices in an uptrend and tells the trader how strong a particular market trend is. ADX fluctuates between 0 to 100, and any reading above 50 signals a strong uptrend/downtrend and readings below 20 indicate weak trends. It consists of two direction movement (DM) lines, which indicate where the market is headed. The two DM lines are a positive directional movement line (indicating uptrend) and a negative directional movement line (indicating downtrend).
- When the positive DM line is above the negative DM line, the currency pair is in an uptrend and signals traders to long the trade
- When the negative DM line is above the positive DM line, the currency pair is in a downtrend and signals traders to short the trade
Volatility indicators
Volatility indicators measure how rapidly the currency pair prices change in an uptrend or downtrend. Volatility can be determined by taking the difference between the highest price level and the lowest price level. These indicators provide traders with the ideal range between which the currency pair trades along with reversal points.
1. Bollinger Bands
Bollinger Band is an indicator that helps determine if the currency pair prices are touching their high level or low level compared to the current price trend. It consists of three bands, a middle band which is the average price level, an upper band that is placed two standard deviations above the middle and a lower band that is placed two standard deviations below the middle band.
- When the currency pair prices trade above the middle band and near the upper band, it indicates a downtrend reversal and signals traders to exit the trade
- When the currency pair prices trade below the middle band and near the lower band, it indicates an uptrend reversal and signals traders to enter the trade
2. Average True Range (ATR)
Average True Range is an indicator that provides traders with information about the degree of price volatility of the currency pair. This means it signals to show how much the asset price moves on an average on a particular trading day. With the help of this indicator, traders receive entry or exit signals depending on the market direction. The value of ATR is added or subtracted from the closing price depending on whether the trader wants to enter or exit the trade respectively.
Volume indicators
Volume indicators help measure a trend’s strength and provide them with market trend confirmations. These indicators average out the volume and compare it with price movements to place exit and entry orders. The higher the trade volume in the market, the stronger the existing trend is considered to be.
1. On-balance Volume (OBV)
OBV is the technical analysis indicator that relates the currency pair prices to their volume in order to predict future market prices. It provides traders with a bullish or bearish signal and helps them make buy or sell orders, respectively. Whenever a currency pair closes at a higher price level than its previous day’s closing price, it is considered an up-volume signal and indicates a bullish trend. However, when a currency pair closes at a lower price level than its previous day’s closing price, it is considered a down-volume signal and indicates a bearish trend.
- Up-volume indicates an uptrend continuation and signals traders to place entry/buy orders
- Down-volume indicates a downtrend continuation and signals traders to place exit/sell orders
2. Accumulation Distribution (A/D)
The A/D indicator makes use of the currency pair’s price and volume traded to provide traders with a future market directional signal. The accumulation level signifies the buying pressure, whereas the distribution level signifies the selling pressure in the market.
- When a currency pair is trading at high volumes and is accumulated, it indicates a bullish trend and signals traders to long the trade
- When a currency pair is trading at low volume and is distributed, it indicates a bearish trend and signals traders to short the trade
Tips for trading technical indicators
1. Use more than one indicator for confirmation
A technical indicator indicates the right market direction on its own. However, there are chances of false indications, and that is why it is always advised to use at least two indicators together to confirm the trend direction. You can combine indicators like Moving Averages with RSI, Bollinger Bands and ADX or RSI with MACD. When both indicators provide you with the same market signal, the trend is confirmed.
2. Trade with the trend
Technical indicators suggest traders trade along with the trend and not against it because there is a high chance of the market moving in that particular direction. This means if the technical indicators tell traders there is an uptrend, they should buy it, and if it tells them that there is a downtrend, they should sell it.
3. Use multiple time frames
When you use the technical indicator in more than a single time frame, the possibility of the market signals being true increases. Take a short-term (15-minute), medium-term (one-hour) and long-term (one-week) timeframe to confirm trend directions. If the technical indicator provides the same result in at least two time frames, traders can move forward with placing orders accordingly.
4. Trade according to your pre-defined trading plan
It is essential that, as a trader, you always stick to your trading plan. The market is volatile and may not always trade in the direction you anticipated. However, in the long term, when you stick to your trading plan, your trading goals are fulfilled. If the short-term market direction goes against you, it is advised to hold onto trades for some time and act according to the trading plan instead of the current market situation.
Confirm market directions with technical indicators
Technical indicators help traders establish an uptrend or downtrend in the market that in turn results in making successful buying or selling decisions based on the trader’s trading plan. Start trading with Blueberry Markets for competitive spreads and a seamless trading experience. Sign up for a live trading account or try a risk-free demo account.
Recommended Topics
-
How to Use The Bill Williams Indicator
Bill Williams Indicator is helpful in analysing trending markets, reversals and momentum.
-
How to Use Relative Vigor Index in Forex
The Relative Vigor Index (RVI) is a technical analysis indicator that helps measure a trend’s strength in forex trading.
-
Technical Trading Strategies for Day Traders
Technical trading strategies for day traders include technical analysis tools to identify short-term trading opportunities in the market.
-
How to Use The Force Index Indicator in Forex?
The Force Index indicator combines the currency pair’s price and volume to determine the power of bulls and bears in the market.
-
The Ultimate Guide to Trading Trends in Forex
Trading trends in forex provides you with opportunities to identify the strong market direction and enter an order accordingly.
-
MT5 Indicators Every Trader Should Know
MT5 is a forex and stock trading platform that enables traders to place automatic orders.
-
What is Volume Trading Strategy
Volume trading in forex is all about trading currency pairs with high buying or selling pressure.
-
Top Low Spread Scalping Strategies For Forex Traders
Scalping strategies allow traders to leverage on the small price changes in the forex market to turn the trends in their favour.
-
What is Forex Currency Swap?
Forex currency swap helps reduce foreign borrowing costs and mitigate exchange rate risks.
-
What is Forex Spot Trading
With forex spot trading, one can make significant short-term profits by trading at prevailing prices.
-
How to Short Sell a Currency
Short selling enables traders to place lucrative forex orders even in a falling market.
-
How to Use The Chaikin Money Flow Indicator
The Chaikin Money Flow indicator provides future market direction by analysing the strength of the market trend and underlying buying or selling pressures.
-
What is Momentum Trading? Top Momentum Trading Strategies
Momentum trading leverages market volatility to the trader’s advantage by identifying the strength of the market’s current trend.
-
How to Trade With VWAP Indicator in Forex
The Volume Weighted Average Price (VWAP) helps eliminate any unwanted price fluctuations during the trading period.
-
5 Top ADX Trading Strategies
The Average Directional Movement Index (ADX) strategy measures the forex market’s overall strength.
-
How to Identify a Trend in the Forex Market
Identifying market trends in forex is also helpful in understanding if your trading strategy is going as per plan and where you can improve.
-
Forex Trading Robots: How Do They Work?
Forex trading robots make multitasking possible by processing multiple conditions like order entries/exits and entering stop loss orders automatically.
-
What Are Momentum Indicators in Forex
Momentum indicators measure how strong the price change is in the currency pairs.
-
How to Use Gator Oscillator For Forex Trading
Gator Oscillator helps in identifying a trending or consolidating market.
-
What is The Exponential Moving Average
Exponential Moving Average (EMA) helps in understanding the market’s trend direction.
-
Top Forex Volatility Indicators
Forex volatility defines the risk an investor takes in the market. The higher the volatility, the greater the risk and the higher the potential returns.
-
How to Use Forex Market Sentiment Indicators
Sentiment indicators in the forex market indicate extremely volatile market conditions.
-
How to Use The Hanging Man Candlestick Pattern For Forex Trading
The Hanging Man Candlestick pattern provides downtrend reversal signals, which helps traders place sell or short orders to profit off falling markets.
-
How to Add MT4 Indicators
MetaTrader 4 comes with several built-in and custom indicators to boost your trading strategy.
-
Top MACD Trading Strategies
Moving Average Convergence Divergence (MACD) strategies enable traders to measure market momentum and trend strength.
-
Top Indicators for MT4
MT4 indicators help analyse forecasted currency pair prices and place exit or entry orders accordingly.
-
How to Trade Bullish and Bearish Divergences
Bullish and bearish divergences enable you to trade market reversals.
-
Top Support and Resistance Indicators
Support and Resistance indicators identify price points on the forex chart where the markets can potentially reverse.
-
What is The Donchian Channel Indicator
The Donchian Channel indicator can determine volatility and potential breakout signals in the market.
-
How to Install MT4: A Beginner's Guide
MetaTrader 4 (MT4) is a powerful forex trading platform with a user-friendly interface and advanced analytical tools for automating trading.
-
What are Trendlines in Forex Trading?
Trendlines in forex provide clear market signals for placing long or short orders.
-
Market Order vs Limit Order
Market and Limit orders help execute automatic trading transactions, as per your trading preferences.
-
Bearish and Bullish Markets
In the trading world, it is essential to be aware of the bull and bear market trends because they define the direction of the market
-
How to Read Trading Charts
Trading forex live charts can help identify ongoing market trends, which can help you place successful traders.
-
Top Reversal Patterns For Forex Trading
Reversal patterns provide traders with price levels at which the market can potentially reverse.
-
How to Find The Best Forex Trading Signals
Forex trading signals are important market triggers that provide traders with ideal entry and exit price levels in the market.
-
Top Forex Trading Strategies That Actually Work
Trading in forex, you will come across several forex trading strategies -- some more complex than the others. It is immensely crucial to start forex trading with the right strategy.
-
Scalping vs Swing Trading: What’s the Difference?
Every forex trader has a different purpose, objective, time constraints, and investment capital. The right forex trading style for you depends on your main trading goals and requirements.
-
What are Volume Indicators
Volume in the forex market can be used to determine the upcoming market trends. Volume indicators are forex trading indicators that can identify if the volume for a particular currency pair is high or low, providing traders with market continuation and reversal signals
-
Shooting Star Candlestick Pattern
The Shooting Star Candlestick Pattern can identify bearish market reversals and provide traders with ideal price levels to short or exit the trade.
-
Top Trading Chart Patterns
Predicting future currency pair prices help in confirming market continuation and reversal signals.
-
What is Slippage in Forex Trading?
Slippages occur when a currency pair order is executed at a price different from the set market order price.
-
Buy limit vs Sell Stop Orders in Forex
Placing buy limit and sell stop orders help employ a price control strategy on forex trades. Let's take a look at buy limit vs sell stop orders.
-
The Best Time Frame For Forex Trading
A time frame is a designated time period where forex trading takes place. Time frames can be measured in minutes, hours, days, weeks, months and years.
-
Top Continuation Patterns
A continuation pattern indicates if the current market trend is going to continue in the same direction or not
-
How to Ace Divergence Trading in Forex
The forex market is all about timing your trades well. Divergences give traders a market reversal signal right before a price trend changes
-
How To Trade Forex With Japanese Candlesticks?
A Japanese Candlestick is a technical analysis tool used to analyze the currency pair’s price movement in the forex market.
-
Top Momentum Indicators To Analyse Trend Strength
Momentum indicators are technical analysis tools that determine in which direction the market is headed and how strong or weak the ongoing trend is
-
Types of Moving Averages Every Trader Should Know
Moving Average is a technical indicator which averages out currency pair prices in a specific time period in order to accurately identify market trend reversals and support-resistance levels.
-
8 Popular Intraday Trading Indicators
Intraday Trading Indicators help place successful short-term trade orders in the forex market.
-
What is the Tweezer Candlestick Formation?
The Tweezer Candlestick formation is a reversal pattern that indicates either a market top (strong uptrend) or market bottom (strong downtrend)
-
Average Directional Index
The ADX is a strength indicator that measures how strong or weak a particular market trend is.
-
How to Use Elliott Wave Theory For Forex Trading?
The Elliott Wave Theory analyses a currency pair’s long-term price movement in the forex market.
-
What are Pivot Points in Forex
Pivot Points help traders identify market reversals. With Pivot Points, traders can predict the support and resistance levels of a currency pair to make entry and exit decisions.
-
Keltner Channel
Keltner Channel is a technical indicator that provides traders with strong continuation signals and trend directions by assessing a currency pair's price volatility.
-
Leading vs Lagging Indicators
Leading and lagging indicators help traders measure the future and current performance of a currency pair, respectively. These indicators can help make successful trading decisions.
-
What is Relative Strength Index?
Relative Strength Index (RSI) helps traders understand how frequently the currency pair prices change in the forex market to predict the future market prices.
-
Wide Ranging Bars
Wide Ranging Bars are strong momentum indicators that help traders understand the market direction and identify ideal entry and exit points.
-
Harmonic Price Patterns in Forex
Harmonic Price Patterns allow traders to predict future price movements and trend reversals to make ideal entry and exit decisions in the Forex market.
-
Double tops and bottoms
Double Tops and Double Bottoms chart patterns help traders identify solid bullish and bearish trend reversals in the Forex market, and in turn, find the ideal market entry and exit points.
-
Falling and Rising Wedges
When you are trading currency pairs in the Forex market, it is essential to know when the market can possibly reverse. The Falling and Rising Wedges pattern help identify market reversal signals and accurate market entry and exit points.
-
Forex Scalping Strategy
Scalping refers to trading currency pairs in the Forex market based on real-time analysis. With Forex scalping, you hold a position for a very short period and close once you see a profit opportunity.
-
Symmetrical Triangle Pattern
Symmetrical Triangle Patterns help identify market breakdowns (price fall) and breakouts (price rise), and in turn, help you plot the entry and exit prices for profitable Forex trading.
-
Introduction to Technical Analysis in Forex
Technical analysis in Forex trading provides you with significant market trends, reversals and fluctuations and in turn helps you long and short term trades.
-
Trading breakouts and fakeouts
Breakout and fakeout trading enable traders to take positions in rising and falling markets.
-
Fundamental Analysis in Forex Trading Explained
Fundamental analysis in Forex trading is one of the several methods you can use to determine the relative security and intrinsic value of a nation’s currency.
-
8 Top Commodity Trading Strategies
Commodity trading is one of the best ways to diversify your portfolio and protect yourself from losses incurred due to inflation.
-
What is a Doji Candlestick?
The Doji Candlestick is a pattern used in technical analyses of trend reversals in a market.
-
Moving Average: The Complete Guide
Moving Average is used in Forex trading to compare the current currency pair pricing and where it stands with respect to the current average pair prices.
-
What is Volatility Index (VIX) and How Do You Trade It?
One of the most popular trading markets in the world, the foreign exchange market allows investors to make quick money by trading currencies.
-
Forex Profit Calculator
On average, a Forex trader can make anywhere between 5 to 15% of the initial amount they invested in the market.
-
Understanding markets gaps and slippage
The foreign exchange rate reveals valuable details about particular currencies a trader wishes to trade-in.
-
What is a pip in forex?
When trading in the Forex market, you need to have a close eye on two currencies at the same time. PIP helps you denote the change in a currency pair’s value.
-
Introduction to Order Types in Forex
Forex has different order types which allow traders to automate entering and exiting positions.
-
Using orders to manage risk
Forex risk management includes a robust set of rules and regulations that protect you against Forex's negative impacts.
-
Managing risk in 7 steps
Risk management in Forex is essential to individuals, groups of individuals, and organizations since it enables them to implement measures that help mitigate Forex risk and its negative impact.
-
Bullish and Bearish Flag Patterns
Blueberry Markets discusses why it is essential to study the bullish and bearish flag patterns in Forex. Learn more.
Advanced
Master risk management and
become an expert forex trader.
Move on to the advanced course.
Guide to Forex
Trading indicators.
Enter your details to get a copy of our
free eBook
Start a risk free
demo account
News & Analysis
Catch up on what you might
have missed in the market.