Complete Guide to Forex Indicators

Doesn’t everybody love a cuckoo clock? 

Okay, maybe not everyone is a fan of the noisemaker on a spring that pops out every hour to let you know what time it is. But if you’ve ever lived with a cuckoo clock in the house, you know one thing: you’re never confused about what time it is. ⏰

When you’re just starting out trading forex, it can sometimes feel like trying to tell time without a watch. The more you learn, the more you can read all those squiggly lines and figure out how to position yourself so you’re most likely to win big. 

And as you continue your research and tune into world events like Japan’s rising inflation or the European Central Bank’s new inflation caps, you get better and better at predicting which trades will be profitable. 

But still—what you really want are those things that shout out like a cuckoo clock that it’s time to make a trade. That’s where forex indicators come in. In this guide, we’ll take you through what indicators are, how you can use them to make better trades, and what types of indicators you can start looking out for.

Sound good? Let’s dive in! 🤿

What are Forex Indicators? 💱

There are plenty of strategies for trading forex. Of course, in general, the more you learn about forex, the better your trades will be. As you spend more and more time gazing at charts and watching the movements of currency pairs, it’s important to learn what certain movements signal about what’s ahead. 

Forex indicators are basically patterns that predict how the market is going to move. They can help you make better trades, and find better entry and exit points. In addition to indicators from political news such as rising expenses in the U.S. or the strengthening Japanese yen, forex indicators can help you predict what the market will do just by looking at the charts.

Forex indicators are usually some kind of technical analysis or mathematical calculation. So whip out your thinking cap—because once you get a handle on these indicators, you’re going to keep using them for all your trades.

How to Use Forex Indicators 💡

Plenty of everyday traders are entering the forex market since it’s easy to start and accessible to learn. If you’re already learning about indicators, we assume you have a brokerage account with one of the leading forex trading platforms set up. Your brokerage account will likely provide most of the indicators you’ll be interested in. But let’s double-check!

Open your app up. There should be a menu that says “Indicators.” If you select one, it will pop up on your chart or right next to it. Some indicators (like simple moving average) will just add more lines to whatever price chart you’re looking at. Others (like relative strength index) usually appear separately from your price chart.

If you aren’t set up with a broker yet, or you’re not sure about the app platform—don’t worry! There are also free charting software that can help you work with forex indicators. So, you won’t have to sit at home with your calculator figuring all of this out yourself.

If you are wondering where to begin in the first place, you needn’t worry about it either, opening a brokerage account has never been easier.

Indicators can be used to determine whether it’s a good time to buy or sell. They should be used in tandem with your other forex knowledge, like the EU’s warning of coming inflation or the volatile U.S. bond market. In other words, indicators are not the only tool you should have in your toolbox, and you definitely need to understand what they mean before you use them to make decisions. 

Top 8 Forex Indicators for Trading 🚀

Now let’s get into the good stuff! You know what forex indicators are, you know you need to learn them—so let’s dive in and cover some of the most popular and effective indicators for trading forex.

#1 Moving Averages ✅

Over the course of any period of time, we’re going to see fluctuations in the price of a currency pair. Sometimes, you need to take a broader look at what’s going on with a pair, and how today’s fluctuations fit into that. 

A simple moving average will show the average closing price of a currency pair over a certain number of days. Usually, traders use 50-day and 200-day averages.

You can compare the current price to the moving average to figure out who is controlling the market. If the price is above the moving average, that indicates that buyers are controlling the price of the security. If below, it means sellers are controlling the price.

Better still, you can compare two averages: The long-range average (200 days in this case) tells you about the general trend of a currency pair. If a short-range average (50 days) goes above the long-range average, that indicates that the price is trending upwards. The opposite is also true: If the long-range average takes the lead, this indicates that the price is trending downwards.

The best way to learn anything is through a vivid example, so take a look at the analysis made by Tom Westbrook where he explained the movement of EUR and USD over a month and a half concluding that the EUR is above its 20-day moving average.

Rules for Trading Moving Averages 📃

Moving averages help you determine whether it’s a good time to buy or sell. 

• If the long (50-day) average goes above the long (200-day) average, it means that prices are high.
• If the long (200-day) average goes above the short (50-day) average, it means the price is low.

#2 Moving Average Convergence Divergence (MACD) 👇

Moving averages can be expressed differently based on the time period you’re analyzing. You can compare different time periods to understand how a pair is moving in the broader scheme of things.

For example, say you take a 50-day moving average and a 200-day moving average on a given pair. If the 50-day moving average is above the 200-day moving average, then the trend is favorable. But if the 200-day moving average is higher, then the trend is unfavorable. 

Moving averages are useful for identifying how the market is trending in a major way. You can also zoom in by using different moving average crossovers, such as 10-day/30-day. This will give you a stronger sense of immediate price trends, though it can also be more reactive to temporary changes that could set you on the wrong path.

However, unlike just looking at two averages, using MACD tells you how strong the trend changes you’re looking at are and will tell you when the trend is slowing down. When the bars in the MACD indicator reach peak levels, they change directions and that usually means the price trend will reverse if it hasn’t already.

Rules for Using MACD 📑

When using moving averages, remember:

• ☑️ Beware of short-term price fluctuations that could skew your perception. 
• ☑️ This indicator can be used to determine a long/short position or as a buy/sell signal.
• ☑️ MACD is useful for checking if a trend is slowing down.
• ☑️ If the shorter time period is higher than the longer time period, that means the price is trending upward (enter a long position).
• ☑️ If the longer time period is higher than the shorter time period, that means the price is trending downward (enter a short position). 

#3 Relative Strength Index 💪

The relative strength index (RSI) is a very popular indicator that helps you figure out whether a currency pair is overbought or oversold. This will usually tell you that a reversal in the market is about to take place. 

RSI index is not bound only to forex it can work as a measurement for many other things, for example due to the chip shortage car manufacturers were forced to delay their production which means wonders for the second-hand cars and trucks industry.

The prices of the cars have risen very high, but they are still being bought, as shown in their RSI index. Chief market strategist Matt Maley in his on-air appearance on CNBC said: “If you look at their weekly RSI charts, relative strength index, they are getting overbought.”

In order to calculate the relative strength index, you need to understand a few other metrics. These will all be done within a set time period that you have chosen to analyze.

• Average gain: Add together all the periodic gains in closing prices. Then, divide this total gain by the period.
• Average loss: Add together all the periodic losses in closing prices. Then, divide this total loss by the period.
• Relative strength is determined by dividing the average gain by the average loss. 

You can then analyze the price on a scale from 0-100 using this index (actually, your software will do it for you, but you can do it yourself if that’s your thing). If the relative strength index is under 30 and close to 0, that indicates that the market is oversold. As values go over 70 and near 100, this indicates that the market is overbought. 

Rules for Using Relative Strength Index 💪

The relative strength index is used to determine if the market is overbought or oversold. This in turn tells you whether things are poised for an immediate change. This is most useful for timing when to enter or exit a trade, rather than determining the potential of a long-term position. 

• ☑️ Enter a long position when the market is oversold (0-30 RSI).
• ☑️ Enter a short position when the market is overbought (70-100 RSI). 

You may choose your own trigger points for when to enter a trade, but these are given as an example. 

#4 Bollinger Bands 🩹

Bollinger bands can help a trader decide when to take their profit on a trade that has gone well, or when to enter a trade. Moving averages play an important role in this indicator as well—and it can get a little complicated, so stick with us!

First, this tool takes the standard deviation of price-data changes over a certain period. Then, it adds and subtracts that standard deviation from that same period’s average closing price. This creates “bands,” which show you how the current price fluctuation relates to the moving averages over a certain period. 

If the bands are far apart, that indicates a period of high volatility. If the bands are pretty close to their midpoint, that means the price is being compressed. 

Also, in currency trading, when bands compress as volatility drops, this is usually followed by an expansion and a sharp increase in volatility. The opposite is also true—wide bands are usually in for a tightening. Needless to say, if prices go outside the range of the Bollinger bands, they won’t stay there for long—if the price is above the band range, it is time to sell, and it is time to buy if it’s below the band range.

Rules for Using Bollinger Bands 📖

Bollinger bands can be used to time a trade’s entry, or exiting a profitable trade.

• If you have a long position, it might be a good time to reap your profits when the price reaches the upper band. 
• If you have a short position, it might be a good time to reap your profits when the price reaches the lower band. 
• If the bands are very compressed, a spike in volatility usually follows, which means a great buying or selling opportunity based on the direction of the coming trend.

#5 Stochastics 💰

Stochastics, or a stochastic oscillator, is another helpful tool to determine whether a security is overbought or oversold. Basically, stochastics compare the periodic closing price to its price range.

Stochastics are typically identified by the symbol %K. They are determined based on the following formula: 

Typically you’ll see two lines plotted on your chart for stochastics. These lines represent the slow stochastic %K (as calculated above), and the fast stochastic %D, which is a moving average. 

Just like the RSI, stochastics are expressed on a scale of 0-100. The closer the value is to 0, the more oversold the security is; the closer the value is to 100, the more overbought. Generally, if the number on your stochastic indicator is over 80, you should probably sell, and if it is under 20, it is probably time to buy.

Rules for Using Stochastics 📜

Stochastics can help you determine when to enter or exit a trade. 

• ☑️ Enter a long position when the market is oversold (between 0 and 20)
• ☑️ Enter a short position when the market is overbought (between 80 and 100). 
• ☑️ They can be used in tandem with RSI, Bolinger bands, and other indicators for more thorough price predictions.

#6 Ichimoku Charts ➗

Ichimoku Kinko Hyo are equilibrium charts that have been gaining popularity with traders in recent years. They actually combine three indicators into one chart, the first two being: 

• Tenkan Sen: the sum of the highest high and the lowest low, divided by two. This sum is taken over the past nine time periods.
• Kijun Sen: the sum of the highest high and the lowest low, divided by two. This sum is taken over the past 26 time periods.

You can see these two lines relating to one another in the following chart. Because we see the Kijun Sen falling below the Tenkan Sen, that means that short-term prices are falling below historical lows—signaling an overall downturn.

Now, we add in the third component. The Ichimoku “cloud” shows current and historical price action, very similar to support and resistance lines. The cloud is comprised of:

• Senkou Span A: The Tenkan Sen plus the Kijun Sen, divided by two, then plotted over the next 26 time periods (into the future). 
• Senkou Span B: The sum of the highest high and the lowest low, divided by two. This is taken over the past 52 time periods and then applied over the next 26 time periods.

These two additional lines help you confirm the trend indicated by Tenkan and Kijun. When Senkou A is above Senkou B, it confirms an uptrend—the greater the distance between the two, the stronger the trend. By the same logic, when Senkou B is above, this confirms a downtrend.

The shaded space between Senkou A and B is what’s referred to as “the cloud”—when the price of a currency pair is above the cloud, it is likely that it will dip below it in the future. Vice-versa is also true.

Rules for Trading the Ichimoku Cloud

The Ichimoku Cloud helps you compare current trends to short- and long-term historical trends, and forecast all of these into the future. 

• ☑️ If the price is below the cloud, it’s a good time to consider buying.
• ☑️ If the price is above the cloud, it’s a good time to consider selling. 
• ☑️ When Senkou A and B cross, the change can indicate that a trend reversal is coming.
• ☑️ The Tenkan Sen and the Kijun Sen act the same way as the Moving Average Convergence Divergence (MACD). If the Tenkan dips below the Kijun, this indicates that there is an overall downturn. 

#7 Average True Range 📈

Average true range is a great way to determine how volatile a certain security is. They help you compare current price fluctuations to the ranges of previous prices. 

Range is the most important metric for this indicator. Range is calculated by subtracting the periodic low from the periodic high. You can set this for any period: within one day, over the previous day, or over multiple days.

If the average true range is low, that indicates the security is not very volatile. If it is high, that indicates it is more volatile. However, even if you know that volatility is high or low, you still need to use other indicators to predict the direction in which prices will move.

Rules for Trading with Average True Range

This is a particularly helpful indicator if you are scalping or day trading forex, as you can determine which securities are having short-term volatility and make a profit off these small fluctuations. 

• ☑️ If the average true range is low, that means the security is not very volatile.
• ☑️ If the average true range is high, that means the security is very volatile.
• ☑️ The ATR is not very reliable as a prediction tool when used on its own.

#8 Parabolic Stop and Reverse ⛔️

The parabolic stop and reverse helps you to identify the direction of a trend and where it might reverse—in other words, where a security is overbought or oversold. It does this through a series of “dots”: each dot is placed above or below the prevailing trend.

This helps you see at a glance whether the trend is going downward or upward. Unlike long-range moving averages, the parabolic stop and reverse indicator can be helpful for noticing shorter-term trends as they come.

Rules for Trading Parabolic Stop and Reverse 📋

The parabolic stop and reverse helps you understand the overall trend of the market.

• ☑️ If the dots are above the price, that means the security is trending downward.
• ☑️ If the dots are below the price, that means the security is trending upward.
• ☑️ Volatile markets can make this indicator difficult to read, but many traders appreciate it for its simplicity. 

What to Keep in Mind when Using Forex Indicators

Indicators are a technical analysis tool that can help you make informed decisions about your trades. They don’t necessarily mean anything in themselves, and often it’s best to use multiple indicators to analyze whether it makes sense to enter a trade. 

And of course, the market is never totally predictable. Stay on top of daily news like declining U.S. stock market prices amid concern about the Delta variant, and use that knowledge plus technical analysis to make informed decisions. 

Forex indicators can get you a good idea of when to enter trades and give you new insights when reading forex charts, but the market will still do whatever it’s going to do. Even if everything is mathematically perfect in your analysis, one piece of significant news can send the market in a completely unpredictable direction—this is why technical analysis is primarily used for day trading where each trading day is viewed separately and price changes due to big news are far in between.

Conclusion ⭐️

You wouldn’t build a house without a certain set of tools. Just because you have a hammer doesn’t mean that you know how to build a house, or that a hurricane won’t blow through and knock the whole thing down. Similarly, forex indicators can help you analyze market conditions and make informed decisions, but they’re just a piece of the larger puzzle. 🧩

By working through this guide, you’ve now put a whole lot of offerings in your metaphorical toolbox. Be sure to use these in tandem with each other, and understand what exactly a given indicator is telling you. If you follow that advice and use your head, you should see your trades start to improve! 

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