The Best Forex Indicators For Currency Trading
Technical indicators are essential tools for analysing market data and shaping your trading strategy. Discover how they work, the different categories and the best forex indicators within them to enhance your analysis.
Technical analysis can feel overwhelming if you're new to it, but the top forex indicators should improve your returns when used correctly. So, how can you identify and narrow down your options?
Below, you'll uncover:
- What is a forex indicator?
- How do forex indicators work?
- What are the different types of forex indicators?
- What are some of the best forex indicators?
- How to choose the best forex indicator for you
What is a forex indicator?
In trading, indicators are mathematical tools that help you interpret market data. They're popular in forex trading as well as other markets including stocks, indices, commodities and crypto. When used strategically, forex indicators give you telltale signs of when to enter or exit trades or manage risk.
There are thousands of currency indicators available to analyse specific data points such as price – open, high, low and closing – and volume. They can be used alone or in combination and alongside fundamental analysis too.
As a result, it's important to establish what information is most relevant for you and the market and what is superfluous. The best indicators for your forex trading will depend on your strategy and style; we'll study some of your options later in this guide.
How do forex indicators work?
Forex indicators use mathematical calculations to turn raw data into visual representations that are overlaid on price charts or displayed separately. You can deploy them to spot patterns, divergences and other signals that might improve your prospects when trading your chosen pair(s).
There are several types of forex indicators that look and work in different ways, which you can discover more about in the next sections. If you need catching up on the broader goals and practice of technical analysis first, read our in-depth guide.
What are the different types of forex indicators?
While there are countless indicators out there, you can broadly categorise them in four ways: trend, momentum, volatility and volume. Some indicators can fall into two groups, such as trend and momentum.
- Trend forex indicators: Helping you spot prevailing price trends and trade with them or, in certain circumstances, against them.
- Momentum forex indicators: Helping you identify when pairs are rising or falling in price and at what rate. Also known as oscillators.
- Volatility forex indicators: Helping you measure price fluctuations over time to gauge volatility and whether it suits your trading style.
- Volume forex indicators: Helping you understand how many traders are in the market at a given time to drive price movements.
What are some of the best forex indicators?
The 'best forex indicator' will always depend on the trade and trader context, but here are some of the most popular you should be aware of.
Best trend forex indicators
Average Directional Movement Index (ADX)
The ADX indicator is designed to show the strength of a price trend, calculated from two directional indicators (DIs):
- +DI, showing how strong the rising market is today compared to yesterday
- -DI, showing how strong the falling market is today compared to yesterday
In essence, the ADX calculates both values to determine which is stronger on the day, telling you which direction the market is currently trending in.
Moving Average Convergence/Divergence (MACD)
The MACD indicator also tells you the force of a price movement, as well as where it may stop in a particular direction and correct. In practice, it shows the relationship between 12-period and 26-period exponential moving averages by subtracting one from the other.
You can use the MACD to spot divergences, which occur when a pair's price hit a higher high or lower low than plotted by a histogram bar.
Best momentum forex indicators
Relative Strength Index (RSI)
The RSI indicator is one of the most popular among traders. It can tell you when a currency is overbought or oversold, which may indicate that a price reversal is on the horizon.
In its plotted range of 0 to 100, 100 is considered overbought and 0 is considered oversold. Anything above 70 can indicate a bearish market reversal, while anything below 30 points to a bullish market reversal.
Stochastic Oscillator
The Stochastic Oscillator can also help you identify when a security is overbought or oversold and a reversal is likely to occur.
It does this by comparing a closing price to a range of prices over time. In a rising market, the price will close near the highs of the trading range, and vice versa during a downtrend. This is shown on a range from 0 to 100 like the RSI, except with levels over 80 signalling overbought conditions and levels below 20 signalling oversold conditions.
Best volatility forex indicators
Average True Range (ATR)
ATR allows you to measure volatility, with increased volatility indicating a possible market reversal and decreased volatility indicating a market continuation.
The 'true range' is the biggest of three measures:
- Current high minus the current low
- Current high minus the previous close
- Current low minus the previous close
The ATR is shown as a moving average over a 14-period of true ranges, with a higher ATR indicating higher volatility and vice versa.
Bollinger Bands
Bollinger Bands also measure price volatility and can help you determine suitable entry and exit points for trades. The indicator has three parts:
- An upper band, calculated from the standard moving average plus two upside deviations
- A standard moving average in the middle
- A lower band, calculated from the standard moving average minus two downside deviations
The market is overbought when prices near the upper band and oversold when prices near the lower band. The bands themselves widen in a more volatile market and contract in a more stable market.
Best volume forex indicators
On-Balance Volume (OBV)
The OBV indicator measures increases and decreases in the trading volumes of currencies relative to their price.
It works on the theory that volume (i.e. demand) typically drives price, therefore forecasting price movements. A positive OBV indicates increasing volume compared to the previous day, while a negative OBV indicates decreasing volume.
Keep in mind the limitations of volume indicators in forex. Because forex is traded over the counter, volume is derived from your broker's data rather than a single global source.
Choosing the best forex indicator for you
Ultimately, the best indicators for forex trading are personal to your trading strategy and style. As a swing trader looking to capitalise on the start or end of a swing, for example, you may use trend or momentum indicators to guide your next move. This approach wouldn't be suitable if you're looking for much shorter-term opportunities, however.
It's important to use forex indicators as one tool of many in your analysis arsenal. Used alone, they could give you false signals or lead you to miss opportunities. This makes it best to understand their limitations and consider the wider market context through fundamental analysis, helping you create a more comprehensive trading strategy.
With Tradu you can trade crypto via CFDs.