Best indicators for forex trading and how to use them

What are indicators?

Indicators are standardised, mathematical measures or metrics that are used to analyse and predict market performance based on patterns detected from tracking the market over time. They’re portrayed through chart pattern graphics. Some of the most popular indicators in trading are moving averages, Bollinger Bands, the relative strength index (RSI), and the moving average convergence/divergence (MACD).

Indicators are plotted on the chosen market’s chart; and they can point towards potential price reversals, direction and strength of price trends, and momentum of price movements. What is tracked by an indicator is underpinned by what type of indicator is used, eg trend-following, momentum, volatility, or volume indicator.

While indicators provide likely price movement based on analysing relevant market data – such as price and trading volume – there’s no guarantee that it’ll transpire as expected. For this reason, many traders prefer to base their decisions on a combination of parallels across multiple indicators, weeding out contradictions. Even then, it’s still important to take other relevant factors into consideration and manage your risk efficiently.

What’s a forex indicator?

Forex indicators are FX pair chart overlays that can help you identify signals and trends in the market based on patterns that have been tracked over time and calculated mathematically. In this context, this technical analysis tool is applied specifically in the market of buying and selling foreign exchange.

Top 10 forex indicators for FX traders

Here are some of the most popular forex indicators:

1. Moving average (MA)
2. Bollinger Bands
3. Average true range (ATR)
4. Moving average convergence/divergence (MACD)
5. Fibonacci retracements
6. Relative strength index (RSI)
7. Pivot point
8. Stochastic
9. Parabolic SAR
10. Ichimoku Cloud

You can use FX indicators for free on our award-winning platform.¹

Moving average (MA)

The moving average (MA) predicts which direction the current price trend is taking. It’s also referred to as ‘simple moving average’ or ‘SMA’. Often the first technical analysis tool to be used, this indicator can be utilised to identify the strength of a trend and any potential impending reversals through support and resistance levels.

The ability to add short-term, mid-term, and long-term MAs to charts unlocks several ways to analyse the market. For example, the occurrence of binary events due to market sentiment holding strong that a forex pair’s price will move back to long-term averages such as the 100-day.

Learn more about the moving average

Bollinger Bands

The Bollinger Band is a useful tool for recognising when the price is outside of the range its generally been trading in over a certain period – it’s often used for breakout and mean reversion predicting. The indicator provides a band within which the price typically trades, of which the width increases and decreases to reflect recent volatility.

When the price moves outside of the Bollinger Band, it’s a signal that it’s out of the ordinary and could, thus, mean that a breakout is imminent – otherwise, it’ll go back into a more ‘normal’ range of prices. This can be useful for a range, where a rally into horizontal resistance is accompanied by the Bollinger Band, thus providing a potential shorting opportunity.

When the price engages with the Bollinger Band, it’s often fleeting, with a quick move away from it. Occurrences where the price maintains and posts a closed candle outside of the Bollinger Band (above the upper or below the lower Bollinger) can signal a potential breakout in the relevant direction.

Learn more about Bollinger Bands

Average true range (ATR)

The average true rate (ATR) indicator is a measure of volatility – it can provide important information, which can aid your position sizing and risk management. The ATR will rise and fall in tandem with volatility, providing you with a tool that can help you make decisions about when to adjust your risk level.

If the ATR is high, swings are likely to be wider, in which case a larger stop loss and smaller position size should be useful. Conversely, a market of lower volatility would likely be suited for a larger position size and closer stop. Some forex traders will apply this indicator to set their stop loss by using a multiple of the ATR to determine their stop.

Learn more about the average true rate indicator

Moving average convergence/divergence (MACD)

The moving average convergence/divergence (MACD) indicator detects changes in momentum by comparing two moving averages. Increasing momentum is signified by the moving averages moving towards one another, ie convergence. Divergence, on the other hand, represents decreasing momentum – the averages moving away from each other.

The MACD indicator can also be used to spot support and resistance levels, potential signals of a market environment with favourable buy and sell opportunities.

Learn more about the MACD indicator

Fibonacci retracements

The Fibonacci tool is a retracement indicator that shows the percentage change in price action from one point to another. Based on mathematical equation rooted in number sequencing, the method of analysis is applied through a series of lines superimposed onto the chart, representing the price fluctuations as a percentage.

This indicator can be applied in several ways. For example, forex traders using support and resistance levels within a trending market to find entry points and identifying price points to set stop-loss levels for potentially favourable outcomes.

Learn more about the fibonacci retracement

Relative strength index (RSI)

The relative strength index (RSI) indicates the direction that a market is likely to take. RSI can be represented as any figure between 0 and 100, but support and resistance levels are set at 30 and 70, respectively. A reading around 30 denotes an oversold market (signifying a possible upcoming rally), whereas a reading around 70 implies that the market is overbought (signalling a possible downward trend).

Learn more about the RSI indicator

Pivot point

The pivot point indicator shows how the supply and demand levels of an asset compare. A disparity in these levels is marked by the asset price crossing the pivot point. Higher demand is indicated by the price moving above the pivot point, while supply is high when it falls below the point. There’s a balance in supply and demand if the price of a currency pair reaches the pivot point.

The ’points’ of this indicator are determined by the previous trading session’s high, low, and closing prices. Forex traders can use this tool’s support and resistance predictions to choose where to enter and exit the market, or to figure out in which direction the market is trending.

Learn more about the pivot point indicator

Stochastic

The stochastic oscillator is a popular example of an indicator that gives you an idea of the underlying momentum behind the price. The stochastic will oscillate within a boundary of zero to 100 – a forex pair with a reading below 20 is considered as oversold, while one that’s above 80 is considered as overbought.

Parabolic SAR

The parabolic stop and reverse (SAR) is a method you can use to identify market trends and possible reversals for potential opportunities and risk management. This indicator is displayed on the chart as an overlay in the form of dots in a sequence based on the trend of the price action.

A bullish overall trend is signalled if the price of a forex pair is above the dots. On the contrary, the general trend is bearish if the currency pair’s price is below the parabolic SAR.

Learn more about the parabolic SAR

Ichimoku Cloud

The Ichimoku Cloud, also called the Ichimoku Kinko Hyo, is an indicator that defines areas of support and resistance, identifies trend direction and measures momentum. The variety of information covered by this indicator inspired its Japanese name, which roughly translates to ‘one-look equilibrium chart’.

The Ichimoku Cloud consists of five key components:

1. Tenkan-sen (conversion or trigger line): showcases the key support and resistance level and a signal line for reversals. It’s calculated by dividing (by two) the combined number of the nine-period high and the nine-period low
2. Kijun-sen (base line): signals entry and exit points based on crosses with the trigger line. This line is located at the midpoint of the 26-day high-low range
3. Senkou Span A (leading span A): used to identify possible support and resistance areas to come. The sum of the numbers for the conversion line and the base line is divided by two to form this line
4. Senkou Span B (leading span B): indicates future support and resistance areas. It’s calculated by adding up the 52-period high and the 52-period low, then dividing it by two
5. Chikou Span (lagging span): signifies potential areas of support and resistance. This line shows the closing levels plotted 26 days in the past

Learn more about the Ichimoku Cloud indicator

What’s the best forex indicator?

The best forex indicator is the one that works best for you, and that will depend on your unique combination of trading style, strategies, goals, and risk tolerance. To find the best forex indicator, you must start off by learning how these tools work to gain a solid understanding of how you can utilise them efficiently.

By interpreting technical indicators, you can discover and explore signals on when to enter the market, where to set stop orders (and when to adjust them), as well as when to exit the market. You can use multiple indicators at the same time – which can be useful – but many are alternative means to the same end. Getting to a point of ‘paralysis by analysis’ can lead to unfavourable outcomes. So, it’s important to make sure that your use of quantity adds value to the quality of your effort to reach your trading goals.