The best Forex technical indicators explained

First of all, there is something we should say: there is no best Forex technical indicator . If what you are looking for is a totally perfect indicator that provides winning signals at all times, you simply will not find it.

On the other hand, there are very good technical indicators that can give you excellent results in currency trading. Next, we will explain what these indicators are, we will mention the best ones and we will discuss their pros and cons.

What are the technical indicators

The technical indicators are visual tools in currency charts that use mathematical calculations to determine one of these elements of the price.

1. Initial price

2. High

3. Low

4. Final price

5. Volume

There are thousands of indicators and each of them has unique mechanics. However, not all of them are profitable and in many cases, they only lead to problems.

Many of the indicators you can find today were developed from the stock market, when the information was updated every 24 hours.

Without further ado, we will now analyze some of the best indicators you can find in the forex market. We hope you study them thoroughly and apply in your trading.

Trend indicators

ADX – Average directional movement index

This indicator technical analysis of Forex is exponential moving averages of 2 other indicators known as DI and -DI +. The objective of ADX is to examine the strength of the trend in a given currency pair.

The DI indicators explain the relationships between the highs, lows and closing prices of the current day and the previous day. Specifically, the + DI indicator explains the strength of buyers today compared to the previous day, while the -DI indicator shows what the strength of the sellers today is compared to the previous day. The ADX basically takes the numbers of the + DI and the -DI to know what the dominant force is today: buyers or sellers.

Once this indicator is shown in the price chart, it looks like 3 lines (the + DI, the -DI and the ADX itself) that range from 0 to 100. When the ADX is below level 20, it is a sign that the trend is weak (applies to upward or downward trend). On the other hand, when the ADX values ​​exceed the level of 50, it is a sign that the trend is very strong.

Likewise, the individual lines of the DI indicators can give signals: if the line + DI is above -DI, ​​it is a sign that buyers are the predominant force in the market. On the other hand, when the -DI line is above the + DI line, it is a signal that the sellers have the power.

Aroon indicator

This is a technical indicator of Forex used to find trends in the market and measure its strength (such as the ADX indicator).

The Aroon indicator considers the previous highs and lows of the price to find trends, find reversals and measure their strength. The indicator has 2 lines: one that takes into account the previous high points and one that reflects the lows of the past. Both lines range in a range from 0 to 100.

When the line corresponding to the high points is around the maximum level, while the line of low points is close to the floor of the indicator, it is a sign of a strong uptrend. Similarly, when the lines of the two indicators cross, it is likely that the trend is about to change.

Since Aroon is an indicator with delay, it serves mainly to confirm the strength of a trend.

MACD – Convergence / divergence of moving averages

The MACD is one of the most famous technical indicators in the trading community, and serves to find changes in the strength of the trend and the direction of prices.

The indicator is based on two moving averages of 12 and 26 periods, which reflect 15 days and 1 month of trading respectively. As you may be able to deduce, the MACD is designed to be used mainly in the 1 day timeframe.

MACD is composed of 3 elements:

1. MACD Line: is the difference between the moving averages of 12 and 26 periods

2. Signal line: MACD line smoothed by a 9-period SMA

3. Histogram: difference between the MACD line and the signal line. It serves to find divergences.

Momentum indicators

RSI – Relative strength index

Momentum indicators help determine if the market is overbought or oversold, which may be a sign of an imminent reversal of the price trend. The most popular momentum indicators at present are the Williams% R, the stochastic and the RSI, which we will explain below.

The RSI, or relative strength index, calculates moving averages (simple or exponential) based on the closing prices of bullish and bearish trends of the past. Then, these moving averages are reflected in an oscillator that goes from 0 to 100.

When the RSI exceeds the level of 70, it indicates that the market is overbought. On the other hand, when the indicator is below level 30, it is a sign that the market is oversold. In overbought conditions, sales orders are made, while oversold purchases are made.

Similarly, with the RSI it is possible to trade divergences: if prices continue to rise while the indicator is down, it is a possible signal of sale.

Stochastic

Like the RSI, the stochastic indicator serves to find overbought and oversold levels in the market with the help of price momentum. The Stochastic compares the current closing price of a currency pair against the highs and lows of a given period of time.

If the price is near the high points, it is a sign that there is an upward trend. On the other hand, if the price is close to low points, it is an indication of a bearish trend.

The stochastic, like many other momentum indicators, ranges from 0 to 100. In this case, when the oscillator lines exceed the level of 80, it is a sign that the market is overbought and when they descend beyond the level 20, is a sample of an oversold market. As you can see, this indicator is very similar to the RSI.

Williams% R

This indicator is very similar to the RSI and Stochastic, only that this time it takes the closing price of the day to compare it with the high of the previous day and the average of high and low points of a given period.

Volatility indicators

Among the Forex indicators it is possible to find the volatility indicators, which are responsible for monitoring the changes in currency prices to make comparisons with past figures. In this category we find 2 indicators: ATR (true average range) and Bollinger bands.

ATR – True average range

This indicator is calculated as follows: the range is the subtraction of the high and low of the current day. “True range” includes the closing price of the previous day. Finally, the “true average range” is an exponential moving average of the true range.

The indicator takes the highest value of the following:

1. Subtraction of the height of the current day minus the low of the current day

2. Subtraction of the absolute value of the current high minus the closing price of the previous day

3. Subtraction of the absolute value of the current low minus the closing price of the previous day

The significant differences between these 3 values ​​are a sign of greater market volatility.

Bands of Bollinger

Bollinger bands are composed of two lines of standard deviation, and are one of the best known technical indicators. These bands serve as dynamic levels of support and resistance. According to the creator of the indicator, when the price touches one of the bands, it is possible that the trend will change soon.

Volume indicators

In some financial markets, such as commodities and currency futures, it is possible to measure the volume of transactions. However, this is totally impossible in Forex because it is an OTC market, that is, it does not have a fixed location where transactions are made.

This means that the volume indicators are based on the broker’s information, so they are not exact figures for the entire industry.

Next, we will show the most popular volume indicator among Forex traders.

OBV – Balance of volumes

This indicator measures the increase or reduction of the volume of the currencies in relation to the price. The OBV is based on the concept that changes in the volume of transactions can be a signal of changes in the direction of the price.

These are just some of the Forex technical indicators that you can find, although there are many more. It is important that you understand their logic and that you do not apply them blindly to your operations.

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