Learning the best Forex indicators is an excellent way for almost anyone to start with Forex trading and make some extra money. However, it only works if the trader has the knowledge required to consistently make beneficial trades. That is why education and knowledge are considered power in the Forex trading world.
There are two main things a trader needs to have knowledge of (besides how to actually make the trades/use a platform). The first is how the market works and the second is Forex trading indicators. Knowledge of these two things together is what helps a person make trades that result in substantial gain rather than loss.
Below you will find a breakdown of the best Forex indicators that every trader should know in 2021.
What is a Forex Indicator?
Forex traders, especially beginner traders, tend to try and learn a bunch of different Forex indicators and then use them all to develop their own trading strategies. When it is that complex, it is much easier to make a mistake and can be overwhelming.
For this reason, it can actually be better to learn a handful of the best Forex indicators and use your favorite to develop a strategy for your trading. If you use multiple Forex trading indicators, you should use different types of Forex indicators, or they will not be nearly as beneficial.
However, you do not have to use a large variety of Forex indicators in order to make a good prediction; some people even use as little as one Forex trading indicator.
But what is a Forex trading indicator?
A Forex trading indicator is a certain change or pattern a Forex trader looks for in the market to predict future shifts and changes.
They can use these predictions to decide the best time to make trades in either direction. The more indicators they are using, the more accurate they can get if they make their calculations correctly, but any error can result in series of trading losses.
An indicator is calculated within a certain time frame, so choosing a time frame is the first step. A Forex trader can look at a weekly, daily, hourly, or even smaller frequency for a specified period of time. By looking at specific data, such as moving averages, a trader can use their knowledge of market patterns to make predictions.
Trend Forex Indicators
Financial markets tend to operate along with certain patterns or trends. Following these trends can be extremely helpful as trading with the trend often lowers the amount of risk you are facing.
Additionally, trend indicators tend to be one of the easiest indicators to track as they are based on long-term moving averages and do not require constant calculation.
It is a great idea for every Forex trader to have at least one trend indicator in their toolbox. Below you will find a breakdown of one of the best trend indicators, the Moving Average.
Trend Forex indicators are typically based on longer-term moving averages (more on moving averages below), but many traders want information on more current/short-term averages because they can be signal faster shifts and changes in or ending of certain long term trends.
The advantages of trend indicators are that they are easy to set up and easy to interpret. They can track both individual currencies and pairs, can follow other trading plans and develop their own, and more.
Forex trend indicators show a large variety of trends, including, but not limited to, uptrends, downtrends, and consolidation phases. Uptrends, which are also called bullish trends, show the price rising. Downtrends, which are also called bearish trends, indicate that the price is decreasing. Consolidation shows a break in movement before it continues along with the trend.
Moving Average
In simple terms, a moving average is a line that shows the average price of a currency or currency pair over a period of time to show the overall direction of the market. There are a few different kinds of moving averages; you will find the two most popular types of moving averages broken down below.
Simple Moving Average
The Simple Moving Average, which is often referred to as the SMA, is the arithmetic mean (average) for a specified time period. The SMA is designed to smooth out price movements so you can easily identify a trend. It is a great indicator when it comes to confirming a trend; however, the longer the period of time someone looks at, the smoother the SMA line will look which means it will have a fairly slow reaction to changes in the market, which is its downfall.
Exponential Moving Average
The Exponential Moving Average often refers to as the EMA. It is very similar to the SMA, but it targets more recent prices, so it responds quicker to price changes. For long-term averages with EMAs, a person may look at 50 to 200 days, and for short-term averages, a trader may look at 12 to 26 days. It is more complicated than the simple moving average, but if you are only using one Forex trading indicator for your strategy, this is a great option. You can use a dual moving average system to come up with fairly accurate estimates for when you should make your trades.
Momentum Forex Indicators
A momentum indicator is a type of oscillator indicator, and it is also a leading indicator. That means that this type of indicator can predict trend changes before they actually occur, which can be extraordinarily beneficial to traders who are trying to plan out their trades.
A momentum indicator is measuring the rate of change and speed of price movement. A trader can then use this rate of change to estimate the strength (or momentum) of a certain currency pair is. If the momentum is decreasing, a trader can predict that the market may go through a retracement or reversal soon, which will help them know if they should make a trade or not. If the momentum is accelerating, a trader can be confident that the current trend is going to hold for a while.
However, this Forex trading indicator is only beneficial if the trader understands the current market environment so that they can use it as the right signal. It can be used as both a confirmation signal and a reversal signal. The momentum indicator should be used as the first in a trending environment, but later in a range bond market. It can be beneficial in both environments, but only if the trader has the proper knowledge.
Momentum indicators are typically one line on a chart, but traders can add a smoothing line if wanted so that they can get a bigger picture of what is actually happening.
MACD
The MACD stands for moving average convergence and divergence. It is a Forex indicator that can identify a trend and then measure the strength of the said trend, which makes it a great trading indicator.
Many traders would argue that it is the best Forex indicator if you are going to choose just one. There are a few different components to this indicator. The first is the MACD line. This line is typically calculated by subtracting the 26 days EMA from the 12 days EMA. The second is the signal line. This is a nine-day EMA of the MACD line. The final part is the MACD histogram, which shows the difference between the MACD line and the signal line.
When the MACD line crosses below the signal line, it is typically a signal that the trader should sell. After they make the sale, they then should wait until the MACD line crosses above the signal line, and then they should buy. Of course, this is only one example of a trading strategy that uses this indicator.
This is a great indicator, especially for new traders, because it is fairly easy to use. It is visual, and it is rather easy to notice divergence, convergence, and crossovers. The downfall to this indicator is that some traders have found that the divergence can be unreliable and therefore believe it is better not to use the entire thing rather than risk a problem.
Volatility Forex Indicators
Volatility indicators are a type of technical Forex indicator which means they aggregate data, apply a formula, and then display the results. A technical indicator focuses on price action, so it ignores other fundamental information about the asset.
Simply, this Forex trading indicator analyzes what has happened in the past and then makes predictions based on that what the market will do in the future.
A volatility indicator is a special type of technical Forex indicator. It measures how much an asset tends to stray from the moving average. If a currency has high volatility, this means that it changes often and often trends far away from what is considered average. When a currency has low volatility, it does not stray a lot from the average trend, and it does not change direction all that often.
If a trader is going to use a volatility indicator, they need to also use some sort of moving average indicator, too, of course. Without a moving average, it does not help a trader all that much to know how much a currency tends to stray from the average. However, if a trader knows a moving average, this indicator helps a trader know how much they can trust that average. If an asset has high volatility, they may be risking more if they simply trust the average than they would if an asset has low volatility.
Bollinger Bands
There are various types of volatility indicators, but one of the most popular options is the Bollinger Bands. This indicator creates a “price channel” around the current market price to help you make accurate predictions. The price channel consists of three separate lines.
The first line is your moving average line, which is typically 20 periods. You can use any value, but experience traders generally recommend 20. The other two lines are lower and upper lines based on standard deviations. The upper line is a resistance line, and the lower line is a support line.
Bollinger Bands are based on the prediction that the market will stay within the upper and lower lines. Knowing the estimated maximum and minimum that the market could shift to can help a trader calculate risk and estimate change. A trader can expect if the market approaches the upper or lower line, it is likely going to reverse soon. Of course, it can move past the lines, but this is extremely unlikely.
Bollinger Bands, while remaining simple and easy to read, add another level of understanding when compared to moving averages alone to help the trader make more accurate estimates. There is always a risk with Forex trading, but having more knowledge and the ability to be more accurate will help minimize these risks.
There are, of course, other kinds of volatility indicators that traders use, but Bollinger Bands tend to be the most straightforward option, making it great for both experienced traders and newbies.
Volume Forex Indicators
Volume in Forex trading refers to how much of a certain asset or currency has been traded within a period of time.
Understanding volume and being able to use volume Forex indicators can be extremely beneficial for Forex traders as it can help a trader get a better understanding of certain trends and changes. It also shows how much interest there currently is for a certain currency. It is important that volume history is used when looking at fairly current data, as older data is usually irrelevant.
You can use a volume Forex indicator for a variety of different things. First, you can use it to confirm trends. If there is a rising trend, there should also be risking volume because price typically increases when there is increasing demand and enthusiasm for an asset or currency. If there is no evidence of this in the volume, it can represent a weak or soon to reverse the trend.
Volume Forex indicators can also indicate the end of a trend. If there is a sharp change in price and a sharp increase in volume, the trend is typically about to end. This can help a trader judge the risk of making a certain trade as they know if the trend they are using is time-sensitive.
Accumulation Distribution
This is also referred to as the Accumulation Distribution line. This Forex indicator uses both volume and price to indicate whether an asset or currency is being accumulated or distributed. It is trying to measure and identify divergences between the price and the volume to show the trader how strong a trend is. If the price is moving in one direction, but the line of the Forex volume indicator is moving in the other direction, the trend is probably weak and will change soon.
This line basically shows a trader’s supply and demand and how that is influencing the price so they can make beneficial trades. The line can move in the same direction of the price or the opposite depending on the strength of the market trends at the moment. This trend is basically used to calculate reversals and not a ton else. If a trader’s strategy is based around reversals, the volume Forex indicator is a great option for them if they only want to use one. However, if their trading strategy is based on predicting and following trends, they may want to use a different indicator.
There are, of course, other volume Forex indicators, but this is the most common and favored by most traders who use volume-based indicators.
Conclusion
Indicators are an important part of developing a trading strategy. Without them, trading would be a shot in the dark with a lot of risks. However, the strategy or strategies that a person uses depends upon their specific needs.
Some traders usually have multiple different strategies and may use completely different Forex indicators depending on what strategy they are using at the moment. It is important to remember that the more Forex trading indicators you track, the more information you have, which can help you make more successful trades whether you are buying or selling.
However, with more Forex indicators, there is more room for error, which can be devastating for a trader.
Even if you are not using every indicator on this list, it is a great idea for every trader to have knowledge of these various types of free Forex indicators.
In the world of Forex, trading knowledge is power and can prevent financial devastation. It is also important that you have plenty of knowledge about the market itself to help you use these Forex trading indicators correctly. Additionally, if a Forex indicator ever contradicts your knowledge about the market, this can be a sign you need to look back through your calculations.
Hopefully, this article has helped you understand a little bit more about Forex trading indicators, so you are more prepared to make your next (or first) trade. Good luck!
What is a Forex indicator?
A Forex trading indicator is a certain change or pattern a Forex trader looks for in the market to predict future shifts and changes.
What is the best Forex indicator?
A list of proven best Forex indicators that can help you in trading:
- Moving Average
- Simple Moving Average
- Exponential Moving Average
- MACD
- Bollinger Bands
- Accumulation Distribution