ACTUAL FOREX TRADING
Your Ultimate Guide to Trading with Indicators
Technical indicators are controversial; some people love them, others hate them.
This page explains how to use indicators successfully and why you should consider using them.
Welcome to Your Ultimate Guide to Technical Indicators!
Jump to:
The Most Popular Technical Indicators
Ichimoku Kinko Hyo Explained
Do Indicators Work on Lower Timeframes
"I am a price action trader - my strategies rely on my ability to read and trade price action. However, that doesn't mean I don't use indicators. Moving averages and the Relative Strength Index are indicators I rely on and use daily... Read on to learn how you can also use indicators as part of your trading"
Indicators: The Basics
Let's start with the basics...
What are technical indicators?
Technical indicators use price data to predict future price movement. They use algorithms, formulas, and calculations to signal potential market direction, trend reversal, and trend strength.
There are two types of indicators: overlays and oscillators.
Overlays use the same scale as prices on a price chart. They usually appear on or near price data.
Below is a Forex price chart displaying some indicator overlays:
Oscillators don't overlay price charts; they appear above or below them. They typically move and signal within a local minimum-to-maximum range.
Below is a price chart displaying some indicator oscillators:
Why use indicators?
Indicators can signal future price movement and direction. They can help a trader analyse price charts and make trades accordingly.
Most indicators show potential market direction, trend reversal, or momentum.
How to use indicators
Technical indicators can be controversial (as can technical analysis as a whole). Many traders are quick to share their negative opinions on indicators, regardless of whether these traders are actually profitable or not - the internet is full of trading advice from failing traders!
Most people who are pessimistic or sceptical about technical indicators hold these views because they were never taught how to use them properly.
Use indicators to confirm analysis and as part of a trading strategy. No technical indicator can provide reliable enough signals on its own to make a long-term profit. The same applies to trading news events and price action.
Instead, combine multiple aspects of technical analysis to create a profitable trading system. This is called layering.
For example, moving average crossovers will not make you profitable on their own. But combining moving average crossovers with RSI divergence and multiple time-frame analysis can. Combining technical indicators with other indicators or with price action is crucial. I trade by combining multiple time-frame analysis, price action patterns, and price action setups with simple moving averages and an RSI. This setup works very well for me and helps me to analyse and trade Forex.
All indicators are lagging - as they use historical price data - and can give false signals, so layering is vital.
You can learn more about layering in my Guide to Creating a Trading Strategy.
"Traders that use indicators effectively use indicators as confirmation of analysis or as part of a detailed trading strategy... No technical indicator will make you long-term profits if traded solely on its own!"
Indicators: The Most Popular
Below is a list of commonly used trading indicators for Forex trading. You can use these indicators for day, swing, and position trading.
Jump to each indicator using the links below:
#1 Moving Averages
Type: Overlay
Used for market direction, market momentum, and trend reversal
By far the most popular indicator. In my opinion, it is the most helpful indicator, too.
Learn more about moving averages in my Ultimate Guide to Moving Averages.
What are moving averages?
Moving averages are, as the name suggests, averages that move. The moving average represents the market's closing price over a specified period.
SMA or EMA?
The two most popular moving averages are the simple moving average (SMA) and the exponential moving average (EMA). The difference is that the EMA puts more weight on recent price data than older data; the SMA does not.
How can moving averages be used in Forex trading?
Moving averages can show market direction.
They do this by moving in a bullish, bearish, or sideways direction. Faster moving averages above slower moving averages can also signal a bullish market, whereas slower moving averages above faster moving averages can signal a bearish market:
Moving averages can also signal a change in market direction.
When a faster moving average crosses a slower moving average, this can signal an uptrend. When a slower moving average crosses a faster moving average, this can signal a downtrend:
Moving averages can also act as support and resistance. Learn more about support and resistance in my Free Price Action Trading Course.
Below is an example of bullish moving averages acting as support and resistance (dynamic support and resistance):
#2 The Relative Strength Index (RSI)
Type: Oscillator
Useful for market momentum, market reversal, and divergence
What is the RSI?
The RSI is an oscillator that ranges from 0 to 100.
An RSI near 100 can suggest strong upside momentum. An RSI near 0 can suggest strong downside momentum.
How can the RSI be used in Forex trading?
If the RSI signals above seventy, this can suggest an overbought market, meaning an imminent bearish reversal. If the RSI signals below thirty, this can signal an oversold market, meaning an imminent bullish reversal.
Take a look at the example below; the overbought signals have been highlighted:
You can also use RSIs for divergence. RSI divergence occurs when the oscillator forms consecutive highs or lows that oppose the market trend. It signals trend reversals.
Here is an example:
#3 Moving Average Convergence Divergence (MACD)
Type: Oscillator
Useful for market reversals and divergence
What is the MACD?
The MACD calculates the difference between two moving averages (usually the 26-period and 12-period EMAs).
The indicator shows a histogram and a moving-average-like wave.
How can the MACD be used in Forex trading?
When price is trending up and the histogram crosses above zero, it can signal a buying opportunity. When the price is down-trending and the histogram crosses below zero, it can signal a selling opportunity:
The MACD can also show trend direction and divergence.
#4 Bollinger Bands
Type: Overlay
Useful for market reversals and market momentum
What are Bollinger Bands?
Bollinger Bands consist of a moving average and an upper and lower band. They envelope price.
How can Bollinger Bands be used in Forex trading?
When the bands tighten, this can signal low volatility, often followed by a sharp price move higher or lower. This is usually referred to as a Bollinger squeeze:
You can also use Bollinger Bands in several other ways. Some of these are detailed below:
#5 Ichimoku Kinko Hyo
Type: Overlay
Useful for market direction, market reversal and market momentum
What is Ichimoku Kinko Hyo?
This indicator looks as confusing as its name suggests. It includes several moving average overlays, including the Ichimoku Cloud.
How to trade Forex using Ichimoku?
When the price is above the cloud, it can signal an uptrend. When the price is below the cloud, it can signal a downtrend.
The cloud can also act as support and resistance.
Higher time-frame indicators vs Lower time-frame indicators
Indicators are often more reliable on higher time frames than lower time frames.
If you day trade an indicator-heavy strategy, I suggest trading indicator signals from higher time frames before executing on lower time frames. This can create a more profitable way of trading indicators.
Below are examples of indicators from higher and lower time frames. It should be evident that the higher time frame provides fewer but more reliable signals:
Download my FREE Technical Indicators PDF:
