Most Forex Trading platforms are loaded with dozens of indicators. Here are the top 3 most used technical indicators in Forex.
There are hundreds of technical analysis indicators used by forex traders. Every trader will eventually establish their favourites but not before years of painful trial and error. If you’re new to using technical indicators in Forex you probably find it overwhelming to gaze into the screen of your trading platform only to see dozens of indicators staring back at you. Which indicator should you use for technical analysis? This article will give you a leg-up.
Way Too Many Technical Analysis Indicators
In MetaTrader 4, there are 30 technical indicators. In MetaTrader 5, there is 38, and in cTrader, there is 65. Most traders will use more than one indicator in their Forex technical analysis; it’s doubtful there are many who use 30 of them.
Not only are there a lot of indicators, but each indicator also comes with various settings that you can modify. Some platforms let you choose whether the indicator formula uses close prices or you can change it to open, high or low prices. Some platforms also allow you to change the number of periods that prices are derived from.
In this article, we will be introducing you to the three of the most used technical indicators by Forex traders. While there is no official statistic on what the most popular indicators are, we’ve compiled this shortlist based on what traders share in forums, chatrooms and blogs.
Types of Technical Indicators Used Forex
There are four categories of technical indicators, which are Trend, Oscillators, Volatility and Volume.
Trend indicators are used to identify trends in the market.
Oscillator indicators are used to identify overbought and oversold conditions.
Volatility indicators are used to show volatile conditions in the market and highlight when volatility starts and stops.
Volume indicators are used to show how active a market is based on the trading frequency and order volumes of the asset.
Technical analysts usually use an indicator from each of these categories as each piece of information can be helpful towards building a conclusion and making a trading decision. We’ve gone over 3 of the most used technical indicators in forex below.
1. Simple Moving Average
The Simple Moving Average (SMA) is a Trend indicator. Moving averages are used to smooth out the volatility that is shown on a typical chart. When applied on a standard Candlestick chart, you are able to see the highs and lows of each period and the SMA line shows the average price based on previous periods. Usually, this line will slice through the middle of the candlesticks. Traders use Moving Averages to observe trends and get confirmation of other signals they generated from different analytics.
There are several variations of the Moving Average indicator, such as Exponential, Weighted, Triangular, Time Series and Wilder Smoothing. Each of these indicators has a somewhat modified calculation which allows it to show different details.
Traders use Moving Averages for confirming mid-term and long-term trends, identifying support and resistance levels. Moving Averages are very weak when it comes making predictions as they simple consume price data from the past and compare it to current market data.
What makes Moving Averages so widely used, despite the lack of foresight it offers is that many other technical indicators are based on Moving Averages. One such example is Bollinger Bands, which are mentioned below.
2. Bollinger Bands
Bollinger Bands are a Volatility indicator. This indicator is made up of three lines. The middle line is a Simple Moving Average, and the upper band has a standard deviation of 2 added to it, whereas the lower band has a standard deviation of two subtracted from it. As price volatility increases, the bands move further apart. As volatility decreases, the bands move closer together.
The market will roughly trade between the upper and lower bands. Traders use the bands to help them to place support and resistance levels. The higher band is always interpreted as a resistance level and the lower band a support level. The middle band is interchangeably interpreted as either a support or resistance level.
3. Parabolic SAR
Parabolic SAR is another Trend indicator. Parabolic refers to the parabola or curve-like appearance of this indicator. SAR stands for Stop and Reverse.
A downtrend is highlighted by dots above the prices plotted on the chart whereas an uptrend is represented by dots below. Traders look for changes in the positioning of these dots.
When the curve switches from being below the candles to above, it signals that the current uptrend will come to an end. Not only does this indicator signal trend changes, but it helps traders to place their take profit and stop loss levels as well as pending orders to enter the market.
Parabolic SAR is considered by many to be one of the simplest trend indicators to read, which is why we believe it to be widely used by Forex traders. Just like Moving Averages, it does a great job of confirming the presence of a trend. However, Parabolic SAR is also a lagging indicator. It works best only when the currency pair you’re analysing is in a strong trend. If the market is flat, you can’t read much from this technical indicator.
Final Thoughts on Using Technical Indicators in Forex
Some traders like to prove their genius to their peers by sharing complex trade setups with so many lines and objects on their charts that you can barely see the candlesticks. Other traders believe that too many technical indicators in forex can cause decision paralysis.
The truth is, you need to figure out what works for you. Using indicators doesn’t tell you when and where to buy and sell. You still need to test drive them many times and ultimately craft your very own forex trading strategy around the technical indicators that you select.