Have you wondered where to find the most effective trading indicators? Trading in an ever-unpredictable market can pose a big challenge to both newbies and experienced traders.
To improve on trading in such an environment, we will be discussing the top 5 Forex indicators, that if used alongside price action, will yield you great success.
There are so many approaches to doing your technical analysis and one of them is making use of indicators. There are many indicators available for traders. One indicator may work for you while another may not.
The advice is to pick one or two, avoid having too many indicators on your chart as they may end up confusing you. Here I will cover some of the most effective trading indicators.
A lot of consistent, technical traders are known to use these indicators to analyze how the market behaves. Market behavior can be studied and followed, in fact, it repeats itself over time. The market will always behave in a certain way under certain conditions.
Forex indicators come in handy to quickly recognize trends, patterns as they begin forming and gives you an edge over traders who don’t make use of indicators. In this article, we want to have a look at some indicators that we think are the most effective and accurate.
Tested and effective forex indicators
Top 7 most effective and best trading indicators
The best trading indicator is one that best fits your trading style as well as your psychology. There is no single indicator that will fit all traders. In this article, I will discuss the top 7 most effective and best trading indicators that are known to give the best results.
Simple Moving Average
The simple moving average (SMA) represents the average prices over a specific period of time. By average we are talking of arithmetic mean. A 20- day SMA is the mean of closing quotes for the last 20 days. We make use of SMA to smoothen out the price changes. The biggest drawback of this indicator is that it is a lagging indicator. The indicator will only give a signal after a trend has already set in. Greater SMA will show a higher degree of smoothing and at the same time will react slowly to changing prices.
It’s is the simplest type of moving average in forex analysis.
Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X.
SMA will only signal a trend whenever the long-term SMA crosses the short term SMA. If the long-term trend crosses the short-term SMA from below, that is a potential uptrend. On the other hand, if the long-term SMA crosses the short-term SMA from above then there is potential for a downtrend.
Moving average convergence and divergence is an indicator used to gauge market momentum. MACD will not just tell you the direction of a trend, it will also measure the strength of a trend. MACD calculates the existing divergence between the faster and slower EMA. EMA is an exponential moving average which is much similar to SMA only that EMA focusses on more recent prices.
Two lines are plotted on the chart. The MACD line is obtained by taking 12- day EMA and then less the 26- day EMA, afterward, the 9- day EMA is plotted on one single line. You can set the 9, 12 and 26 parameters to other figures for experimentation and come up with optimum values.
How to use MACD:
- When the MACD line crosses from below to above the signal line, the indicator is considered bullish. The further below the zero lines the stronger the signal.
- When the MACD line crosses from above to below the signal line, the indicator is considered bearish. The further above the zero lines the stronger the signal.
This indicator borrows its name from its inventor John Bollinger. Bollinger Band is a volatility channel that will signal a trend. If the current price goes past the moving averages with a certain number of points a trend may be beginning. Bollinger Band is still one of the best volatility channels we have as traders.
Bollinger bands use two parameters:
• Moving average days
• Standard deviation placed past the moving average
Bollinger Bands will always react to market volatility. Wider Bollinger Bands indicate high volatility while a narrow one show low volatility. You will go long if the previous day’s closing price was above the topmost band, and go short if the previous day’s closing falls lower than the lower band.
If the candles start to break out above the TOP band, then the move will usually continue to go UP.
If the candles start to break out below the BOTTOM band, then price will usually continue to go DOWN.
Bollinger bands explained simply and understandably.
When the market is quiet, the bands contract and when the market is LOUD, the bands expand. Source: Babypips.com
Fibonacci retracement will always work best whenever the market is trending. You will go long at the Fibonacci support when the market is on an up-trend and go short on Fibonacci support when the market is trending down.
To find these levels, first, identify the swing high and swing low. Then in case, it’s a downtrend, put your cursor on the highest point and drag to the lowest but recent point. The vice-versa is true for an uptrend, place your cursor on the low and drag to the recent high.
It’s important to remember that while the Fibonacci tool can be useful in identity supports and resistances, the results are not guaranteed. In order to increase the probability of certain retracements acting as advertised, it is best to use the tool along with other indicators like moving averages or the relative strength index (RSI).
For example, if a moving average is in the same location as a Fibonacci retracement, price is more likely to react to the level given there are two support or resistance obstacles, which when combined are more powerful than one. Source: Coindesk.com
Stochastic Oscillators Indicators
The stochastic indicator is one of the most popular forex indicators around the globe. It was created by George Lane and is used to measure oversold and overbought situations in a market. It can tell you when there is too much buying or selling in the market to a point of saturation.
Traders will try to see when a new trend if forming or about to form. Stochastic oscillators provide traders with a tool to tell them that there is so much buying and the trend may reverse. Overbought sections are characterized by a slow momentum signaling a potential turn of events.
Momentum will only shift direction whenever the full line crosses the dotted line. It’s advised not to take all crossovers for a valid signal. Look for crossovers happening on key resistance or support points.
The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. Source: investopedia.com
Relative strength Index will help us know oversold and overbought currencies. This information can be used to gauge a currency’s future behavior. It is best when forecasting future trade volumes and consequent price patterns.
RSI (Relative Strength Index) is counted among trading’s most popular indicators. This is for good reason because as a member of the oscillator family, RSI can help us determine the trend, time entries, and more.
The Relative Strength Index (RSI) was developed by J. Welles Wilder to measure the speed and change of price movements. RSI oscillates and is bound between zero and 100. There are many different uses for RSI and by far the most popular is trading overbought and oversold crossovers.
You can learn more about RSI in our educational article about the world’s most famous forex indicator.
ADX (Average Directional Movement Index)
Have you used the ADX indicator? You find this indicator (also known as Average Directional Movement Index) in both MetaTrader4 & MetaTrader5. The ADX indicator is a very powerful indicator! Just remember to add 2 levels, 20 and 40. I have chosen Blue (for ADX), Red (for negative trend) and Green (for positive trend) as the colors on my white charting background. If the ADX gets over 20 there will probably be some action.
If it is below, it is in the dead trading zone. If the green crosses the red, the currency pair is going bullish. If the red crosses the green, the pair will most likely become bearish. No matter which way the trend is going it is advisable to wait until the green or red line crosses the 20 levels before putting in a trade.
Otherwise, you are still in a dead zone and the pair can cross again and reverse again and you have then put in a trade prematurely. ADX is easy to understand and more accurate than most other indicators we have tested and seems to be a great entry tool.
If you would scalp with the ADX on the shorter timeframes you should just stay in front of the charts mostly all the time… Open the trades as soon as e.g. the green line has crossed the red one… and then stop the trades as soon as you get any indication that the ADX line is starting to head a bit down, especially if the red and green line starts to meet each other…
I would not scalp it in the opposite direction of the clear long-term trend although the ADX may have a sell indication for the moment, as it’s just an indicator and sometimes it switches quite fast from red to green and then back to red… At least the ADX can help you to avoid some unnecessary drawdowns and helps you define an entry point so you do not put in a trade prematurely and suffer through a long consolidation…
Unlike the stochastic, ADX doesn’t determine whether the trend is bullish or bearish. Rather, it merely measures the strength of the current trend.
Because of that, ADX is typically used to identify whether the market is ranging or starting a new trend. Learn how to use the ADX indicator with 9 real examples.
Conclusion – which is the most accurate indicator?
I know the question in the minds of many is to know the best indicator among the seven mentioned above. I will not give you that, remember all these are tools and the way we make use of them determines how profitable we become.
The key here is to know your indicator well, know its drawbacks and understand the market conditions that best suits an indicator. Know situations when your signal goes wrong or even fires false signals. More does not mean better, make use of one or two indicators, don’t paint your chart with countless indicators. Keep it simple.
Let us hear what you think – which are the best trading indicators? Have you any experience with our indicators? Or do you have another favorite indicator? Tell us about it, share it with other traders and let us trade better together!
Hopefully, you found my list of the most effective trading indicators helpful. Let us know what your favorite indicator is in our Facebook group!
Caution: Always remember that these indicators should not be used blindly. Do your own analysis and use these indicators to support your analysis. Some indicators are lagging and if followed blindly will not give you the best results.