The Forex indicators are the special program that works based on mathematical algorithms and helps a trader to read the chart more efficiently, monitor the market situation, and make decisions regarding the conclusion of transactions. Thanks to indicators, traders can more accurately predict future price movements and better analyze current movements.
What traders used to do for hours and manually can now automatically calculate a good indicator, correctly pre-configured and suitable for a trader in terms of trading style, conditions, currency pair, etc.
The main types of Forex indicators
- Trend indicators – confirm/deny current market trends by focusing on chart divergences and making affective forecasts.
2. Oscillators (Forex inertial indicators) are the most popular, are simplified, measure the magnitude and speed of price fluctuations, and analyze price behavior.
3. Psychological – they study the mood prevailing in the market, make predictions actions of trade participants
4. Signal – indicators that provide information about the market situation in the form of ready-made signals ( tips for certain actions in the form of arrows ).
5. Bulk – measure trading volumes.
6. Hybrid – suggest a combination of at least two instruments included in the standard set of the trading terminal.
7. For binary options.
8. Custom – those that traders independently create and share in the public domain on the network (free of charge or for a certain amount).
The indicator is considered to be an auxiliary tool that can make it much easier for a trader to perform technical analysis. Based on the indicators, a lot of trading strategies, systems, robots have been compiled. Trying to determine the best Forex indicators in existence today, each trader should focus on his trading style, preferences, conditions, and other individual factors.
Before choosing an indicator, it is necessary to determine the following basic parameters: does the instrument correspond to the market, what is its principle of operation (which shows why and how it calculates values), how the instrument is used in operation.
You ought not to exchange with markers, the standard of which the dealer doesn’t see well – for this situation, even the most exact Forex pointers can cause misfortunes since any (and most advanced) automatic system requires human participation and the ability to make their own decisions in difficult situations.
Many indicators are already preinstalled in the most popular trading terminals – for example, MetaTrader4 / 5 offers a fairly large selection of standard instruments. Besides, there are many indicators on the web – for free or for a fee.
Before starting the indicator to trade it is advisable to check it on historical data, to evaluate the features, advantages, and disadvantages.
Historical modeling does not guarantee 100% success in the future, but it often allows you to adequately assess the quality of the tool. It is also important to find the optimal indicator settings to receive accurate signals for entering and exiting the market.
You should not try to use all successful Forex indicators in your work at once – an overloaded system will provoke signal delays and may cause a conflict of indicators. It is better to stop at one, the most appropriate tool, and learn it.
If you are going to use the Forex indicators in your work, you should not rely on it completely and consider it the only condition for the profitability of trading. The indicator only allows you to better understand the current situation on the market and indicates entry points.
But the tool will not prompt such parameters
• Optimal trade size.
• Acceptable losses in one trade ( risk management rules ).
• How to manage all deals that a trader can open at once.
To build a trading system, you can take an indicator that provides timely and correct signals as a starting point. But to create filters for entry/exit points, to define methods of money management, you will need a whole system.
Exponential Moving Average
” Moving average ” is the general name for a group of functions, the values of which at all points are equal to the average of the original function taken over the previous period. Usually, this type of instrument is used to smooth out short-term price fluctuations and highlight the main trends (cycles, trends). This is especially important in volatile markets.
Exponential Moving Average ( The Exponential Moving the Average ) allows you to reduce lag, giving greater weight to the latest price value compared to more distant prices. This makes it possible to react more efficiently to all current changes in value (in comparison with the standard moving average). The weight attached to the last price value directly depends on the moving average period: the smaller it is, the more weight the last price has.
So, for example, a 10-period EMA gives the price weight of 18.18%, a 20-period EMA – already 9.25%.
It can be determined by two methods – as a percentage moving average or as a periodical. In the percentage CC, the only parameter is the percentage (weight), in the period – the period.
• i is the current moment;
• i-1 – the previous moment in time;
• К – equal to 2 / (n + 1), where n denotes the period of the average in bars.
Ways to change the exponential moving average period
1. By changing the K.
2. Change in the moving period – in this case, the coefficient K is considered as 2 / (1 + N), N is the specified period.
3. So, for a 10-period EMA, the coefficient will be as follows:
4. In the calculation of the EMA, all price indicators for the construction period are used, but over time, the influence of the old prices decreases and disappears. For shorter EMAs, old prices drop off faster. On real charts, the difference between MA and EMA is not too big, but there is.
5. An exponential moving average represents market prices more accurately but tends to be very responsive to changes in value. Traders often use it for short-term trading to catch prices instantly. Here the choice is always between sensitivity and the desire to reduce the number of false signals. The more sensitive the indicator, the more false positives it gives.
The main features of using EMA: use with other indicators and methods of technical analysis, use to determine the current trend, and search for places to place a stop loss. EMAs can also be used as support/resistance zones to receive signals after crossing the lines.
Trading with RSI
This indicator was created by stock trader Wells Wilder and published in June 1978 in Commodities magazine. Later, the tool was included in Wilder’s book, where he presented the essence of the tool in detail, and after that, the indicator became very popular.
RSI (stands for Relative Strength Index, translated as “relative strength index”) is an oscillator, it fluctuates in a certain zone, set by the minimum (0) and maximum (100) values. The tool displays “momentum” – the amplitude and speed at which the price moves, the force of its change in the direction of movement. That is, RSI helps to determine the strength of the trend and the possibility of its change.
RSI indicator values
1. The more powerful the upward movement of the price (and the greater the total sum of the length of green candles for the n period), the closer the indicator value to 100.
2. The more powerful the downward movement of value (and the greater the sum of the length of the red candles for the n period), the closer the value to 0.
The indicator formula is simple: it is based on the analysis of the closing prices of candles for the n period and their relative difference (when plotting the chart, only the closing values are used, candle shadows are not taken into account). The indicator shows the strength of the price movement for the selected period of time, based on the strength of the candles for this period.
The main signals of the RSI indicator
• Overbought and oversold – the indicator reaches 70 and above (the asset is overbought, it is not worth buying, it is better to exit the trade and set above the stop loss) in anticipation of a trend reversal; an indicator below 30 indicates that the asset is oversold and the risk of selling it at the bottom.
• Determining the direction of the current trend – if the indicator crosses the value of 50, the trend changes, here the price often finds support/resistance. Often, in a downtrend, the price goes to the level of 20, in an uptrend – to 80.
• Search for support/resistance, trend lines – the classic rule of technical analysis works here. Breakouts of support/resistance, trend lines on the indicator often signal a future breakdown on the price chart.
• Working out graphic figures – when they are not on the price chart or are poorly visible, the patterns can work well on the indicator chart.
• Search for divergence – when the values of the price and the indicator diverge: “bearish” is accompanied by an increase in the price highs and a decrease in the highs on the RSI, “bullish” – the price lows are decreasing, and the indicator is increasing. Such situations indicate the possibility of a trend change.
• To use the RSI indicator more efficiently in work, it is worth comparing its values on different timeframes (taking into account the values of the older TF), 14 is considered the optimal period (a period of 14 candles), 9, 25 are also popular. But it is worth remembering that the longer the period, the more noise on the graph.
• The optimal values are 30 (defining oversold), 70 (defining overbought), 50 (looking for a trend). But 40 and 80 (uptrend), 20 and 60 (downtrend) can be suitable for finding a trend.
Bollinger Bands indicator
The Bollinger Bands (aka Bollinger Bands )indicator is a technical tool that was created over 30 years ago by financial analyst John Bollinger. The indicator is still relevant today, it is used to build a volatility channel that allows you to determine the trend.
The Bollinger Bands tool uses the following parameters: the number of days for the moving average and the number of standard deviations. The most popular values are 2 / 2.5 standard deviations, which provide an estimate of volatility.
How the indicator is used
• The curves narrow / widen according to the strength of the market movement.
• As the curves approach one another, the market becomes stronger. Energy is released as soon as the closing price breaks through one of the extreme curves (standard deviations). If the upper curve is broken – a buy signal, the lower one – a sell signal.
• After the breakout occurs, the move will go close to the broken line.
• If during the correction the market reaches SMA20, this is a signal to add positions, because the moving average here acts as support (buy) or resistance (sell).
• It is worth closing trading positions when the market breaks out the SMA20 at the closing price. This happens because if, when touching one curve (upper / lower), the market bounces off it and breaks out the middle curve, it will definitely come to the opposite curve. For example, if the market hits the upper curve, comes back, and crosses the close of the SMA20, then it comes back and hits the lower curve.
Stochastic Forex Trading Indicator
This instrument was created in the 50s of the last century by George Lane. When it became clear that the price movement in the market obeys certain laws, they began to look for patterns and develop methods for predicting future value. Stochastic is one of the first indicators that are still relevant today.
The Stochastic Oscillator measures the rate of change in price (price impulses). It is used to determine the dynamics of the Open closing prices about the High and Low range of quotes for a certain period of the number of days. This is how the speed of the market moves.
The oscillator demonstrates the difference between the value of the current day and the quote, which was several days ago. The process is continuous, displayed on the chart in the format of the Stochastic indicator curve. The standard period is 14 days – that is, the indicator shows the movement of the values of the Open close price in the range between High / Low over the past 14 days.
The ratio is measured in percent from 0 to 100. So, if the oscillator shows 80% or more, the Open price reaches the upper border of the price range, if 20% or less, the closing price reaches the lower border of the range. When the Stochastic curves are between these levels, the asset’s Open price is between its High / Low values.
An indicator of 75% indicates that the price is between the minimum and maximum closing values 75% closer to the high level of the day. If every day the market closes at its maximum values, the Stochastic will show 100% values.
How Stochastic indicators are calculated
• The period of the % K curve is the indicator period.
• Period of the % D curve – the period of the oscillator signal curve, this is the MA from the% K curve.
• Ease – additional smoothing of both curves.
• Prices – this menu allows you to select prices from Open / Close and High / Low to calculate the indicator.
• MA method – the method for calculating the% D line is the same as for an ordinary MA.
• One Stochastic line is displayed as a curve, the other as a dashed line. Solid curve (% K) – main, dotted (% D) – signal.
The main signals of the Stochastic indicator
• Overbought – when the curves go below level 20 and oversold – when above level 80: if the curve goes from bottom to top, open a short position, if from top to bottom, then long. More signals: to buy when the signal curve% D crosses the level 20 upwards and to sell when the level 80 downwards. It is better to wait for the development of the movement of the oscillator curves into the zone between the overbought/oversold levels with the price, leaving stop losses at 80 or 20 …
• Divergences are when the% D or% K curves diverge from the direction of the value. As soon as the price shows a new low, located below the previous one, and the indicator shows a higher low, this is considered a divergence (signal to open a long position). They use divergences that appear below 20 and above 80.
• Bullish (upward) trend – when the indicator is in the range of 100-50, bearish (downtrend), if in the range of 0-50.
Stochastic works well on long time frames with a large price range and gives clear signals in case of a stable trend.
Forex Moving Average Convergence Divergence demonstrates the convergence (convergence) and divergence (divergence) of moving averages. It is plotted as the difference between the two MAs, displayed in the format of vertical bars. The signal line is the moving average of the MACD line itself. The indicator refers to oscillators and is used to analyze the strength of the trend.
To build the indicator, use EMA with periods of 26, 12, the moving average (period 9) acts as a signal line.
The formula looks like this: MACD = EMA12 – EMA26 – EMA9 * (EMA12 – EMA26).
This oscillator is usually used to confirm signals: when the MACD dashes are located above the zero lines, the trend is upward, if below, the trend is a downtrend. A buy confirmation signal is relevant at the moment when the MACD histogram is above the zero lines, a sell signal – the histogram must be below the zero lines.
Convergence/divergence can be considered an additional signal. A signal appears when the price forms new, higher highs, and the indicator bars are located at a height lower in comparison with the previous peak. The bullish trend starts to weaken, the price may go down. The same rule works the other way around.
RoC indicator – accurate and advanced
While trying to find the most accurate Forex indicators, many traders pay attention to the Rate of Change. RoC is an indicator that demonstrates the rate of change in the prices of a selected asset. This oscillator is often used to find emerging trends, as it is considered leading.
The tool is based on a formula that compares the current price values with indicators for previous periods. The higher the rate of change, the more chances that soon the price will go where the indicator is currently going.
A pointer is worked under the value outline as a moving normal, which moves into a field isolated down the middle by a flat zero level. Most of the signals concern the crossing of the zero lines.
The main signals of the RoC indicator
• When the zero lines are crossed from bottom to top – a buy signal, when from top to bottom – to sell.
• Divergence – when the price and the chart go in opposite directions, there is a possibility of a trend change.
• On the indicator chart, you can draw support/resistance lines and perceive rebounds from powerful lines as strong signals. If levels and lines are used in the indicator field, it becomes more important and signals can be used to enter the market.
Accurate indicator ahead of% R Williams
Larry Williams created the Williams% R Oscillator in 1973. This tool, like all accurate Forex indicators, can determine the state of overbought / oversold by the location of the current closing price in relation to the range between the minimum / maximum prices for previous periods. Trading with this indicator is simple: a buy signal appears when it is oversold (% R is in the range of -80% and below), and a sell signal appears when it is overbought (% R is in the range of -20% and above).
To calculate the indicator, the difference between the maximum value and the close price for a certain period is divided by the difference between the high/low prices for this period. The default period is 14.
Formula for calculation: R% = – ((H – C) / (H – L)) x 100 , here:
• C is the last closing cost;
• L – minimum price for the period;
• H is the maximum price for the period.
Williams Percentage Range provides an opportunity to see overbought/oversold conditions, but it is best to use other Forex indicators together with it for general trend analysis.
Williams% R signals
• The pointer goes above – 20 – conceivable overbought.
• Indicator below -80 – possible oversold.
• The indicator crosses the boundaries of the overbought area from top to bottom – a sell signal.
• The indicator crosses the borders of the oversold zone in the upward direction – a buy signal.
• Weakness of an uptrend – when the price rises to a maximum and the indicator does not support such a movement.
• Weakness of a downtrend – the price falls to the next low, and the indicator shows different values.
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