There is no best FOREX indicator. We’re afraid that there is nothing to be done in case you’re looking for the ultimate perfect indicator or one that only gives winning signals. However, there are many good technical indicators providing with great results if you wish to engage in FOREX trading.
What are technical indicators?
Technical indicators are visual tools that use calculations to determine price elements. There are four types of them depending of where your market interest is:
- Trend indicators
Trend indicators are designed to identify and follow the trend of a currency pair. Merchants earn large sums of money when markets are trending. That is why it is necessary to distinguish between situations when a currency pair is in trend and when it is in consolidation, the most popular among forex traders is MACD.
- MACD – Moving Averages’ Convergence or Divergence.
One of the most popular technical indicators, the MACD is used to find alterations related to the strength of a trend and price direction. The indicator is based on two 12-26 periods (2 weeks – 1 month), which represent two moving averages. MACD are better used in 1 day timeframes.
MACD is composed of 3 elements:
- MACD Line, showing the difference between the 12-26 periods’ moving averages.
- Signal line, the same MACD line but smoothed with a SMA of 9 periods.
- Histogram, which is the difference between the line of the MACD and the line’s signal, used to recognize divergences.
- Momentum indicators
These types of indicators help you determine an oversold or overbought market in which reversals are almost imminent. The most popular momentum indicator at present is the RSI.
- RSI – Relative strength index
The Relative Strength Index’s function is to calculate moving averages, whether they’re exponential or simple, parting from past trends’ closing prices. Said moving averages are shown in a spectrum from 0 to 100.
It is said that a market is overbought when the RSI surpasses the level of 70. However, if the indicator dips below the 30th level, the market is probably oversold. In overbought conditions, sales orders are made; conversely, in oversold situations, purchases are made.
In the same way, RSI allows for the trade of divergences; this means that a possible sale signal is when prices keep going up while the indicator stays down.
- Volatility indicators
Among the Forex indicators it is possible to find the volatility indicators, which are responsible for monitoring the changes in currency prices to make comparisons with past figures. The main indicators in this category are True Average Range, or ATR, and Bollinger Bands.
- ATR – Average True Range.
The indicator is calculated by subtracting the current day’s high and low to obtain the range. The “true range” is what includes the previous day’s closing price, and an exponential moving average of the aforementioned range is what makes the “true average range”.
This indicator subtracts the highest value from the current day’s height minus its low. Secondly, it takes the highest value from the subtraction of a current’s high value minus the previous’ day closing price. Lastly, the highest value from the subtraction of the current low’s absolute value minus the previous day’s closing price.
The sign of greater market volatility is given by the relevant discrepancies between said three values.
- Bands of Bollinger
Bollinger bands are formed by two lines which deviate in a standard way; they are some of the most popular technical indicators. They function as support and resistance levels which work dynamically.
Citing the creator of Bollinger bands, whenever a price grazes one of the bands, the trend will probably change soon.
- Volume indicators
The volume of transactions can be measured in some financial markets, such futures for currencies and futures, depending on their respective features. Nevertheless, FOREX being an OTC market makes it impossible for said numbers to be calculated.
In other words, markets where the operations don’t occur on a fixed location can’t have their volumes calculated.
What this entails is that volume indicators in FOREX work using a broker’s information. As such, they can’t be taken as the figures for the entire industry.
- OBV – Balance of volumes
OBV is the most popular indicator for FOREX among FOREX traders.
It measures the increase or decrease in a currency’s volume when related to its price. This indicator is based on the principle that alterations in transaction volume can be taken as a signal for changes in the overall price direction.
While these are some of the main indicators in FOREX, it is important that you understand that there are others which may better suit your practices. Just keep in mind that they are only indicators, not prompts for you to act immediately.