Trading Indicators 101 - Your Ultimate Guide to Technical Indicators

Using technical indicators is a controversial subject; some people love them, others hate them.

On this page you will learn how technical indicators can be used successfully and why you should consider using them.

Welcome to Your Ultimate Guide to Technical Indicators!

samue morton forex trader

"I am a price action trader - my strategies rely on my ability to read and trade price action. That doesn't mean that I don't use technical indicators though... 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"

Technical Indicators 101

Let's start with the absolute basics...

What are technical indicators?

Technical indicators use price data to predict future price movement. They do this through using 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 price on a price chart. They usually appear on price data or near price data. 

Below are some examples of indicator overlays... 

Forex Indicator Overlays

Oscillators do not usually overlay price but usually appear above or below a price chart. They usually move and signal within a local minimum and maximum range. 

Below are some examples of indicator oscillators...

Forex indicator oscillator.PNG

Why use indicators?

Indicators can signal future price movement and direction. They can help a trader to analyse price charts and make trades accordingly. 

Most indicators show either potential market direction, potential trend reversal, or market momentum.

How to use indicators

Technical indicators can be a controversial subject (so can technical analysis as a whole). Many traders are quick to share their negative opinions on indicators, no matter if these traders are actually profitable or not - the internet is full of trading advice from failing traders!

Most people that are negative or sceptical about technical indicators have these views as they have never been taught how to actually use them...

Indicators should be used for confirmation of analysis and as part of a trading strategy. There is no technical indicator that is going to provide reliable enough signals by itself in order to make a long-term profit. This is the same for trading news events and also price action.

 

Instead, multiple aspects of technical analysis should be combined together in order to make a profitable trading system. This is called layering.

As an example, moving average crossovers will not make you profitable by themselves. 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 key. I personally 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 historic price data - and can give false signals, so layering is vital. 

You can learn more about layering on my Trading Strategies Page

Forex Trading Strategy

A List of the most popular Indicators...

Below is a list of commonly used trading indicators for Forex trading. These indicators can be used for day trading, swing trading, and position trading.  

#1 Moving Averages

 

Type: Overlay

Useful for market direction, market momentum, and trend reversal

By far the most popular indicator. In my opinion, the most helpful indicator too. 

If you want a detailed review on moving averages and how to use them, I strongly suggest you read my Moving Averages Page

What are moving averages?

Moving averages are as the name suggests - they are averages that move. The moving average represents the closing price of the market over a specified period of time. 

SMA or EMA?

The two most popular moving averages are the simple moving average (SMA) and the exponential moving average (EMA). The difference between the two 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...

bullish moving average
Moving averages bullish

Moving averages can also signal a change of market direction...

When a faster moving averages 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 average crossover.PNG

Moving averages can also act as support and resistance...

moving average support and resistance

To learn more above moving averages, click here

"Traders that use indicators effectively use indicators as confirmation of analysis or as part of a detailed trading strategy... No technical indicator is going to make you long-term money, if traded solely on it's own!"

samue morton forex trader

#2 Relative Strength Index (RSI)

 

Type: Oscillator

Useful for market momentum, market reversal, and divergence

What is the RSI?

The RSI is an oscillator with a range between zero and one hundred. 

An RSI signal nearing one hundred can suggest strong upside momentum. An RSI signal nearing zero 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 imminent bearish reversal. If the RSI signals below thirty, this can signal an oversold market, meaning imminent bullish reversal. 

Take a look at the example below, the overbought signals have been highlighted...

RSI overbought

RSI's can also be used for divergence. 

#3 Moving Average Convergence Divergence (MACD)

 

Type: Oscillator

Useful for market reversal and divergence

What is the MACD?

The MACD calculates the difference between two moving averages (usually the 26 and 12 EMA's). 

The indicator shows a histogram and a moving average like wave. 

How can the MACD be used in Forex trading?

When price is up-trending and the histogram crosses above zero, this can signal a buying opportunity. When price is down-trending and the histogram crosses below zero, this can signal a selling opportunity...

MACD histogram

The MACD can also be used for trend direction and divergence. 

#4 Bollinger Bands

 

Type: Overlay

Useful for market reversal and market momentum

What are Bollinger Bands?

Bollinger Bands consist of a moving average, an upper band, and a lower band. 

They envelope price. 

How can Bollinger Bands be used in Forex trading?

When the bands are tightening, this can signal low volatility, which is often followed by a sharp price movement higher or lower. This is often referred to as a Bollinger squeeze...

Bollinger Squeeze

Bollinger Bands can also be used in a variety of other ways. Some of these are detailed below... 

Bollinger bands
Bollinger retrace

#5 Ichimoku Kinko Hyo

 

Type: Overlay

Useful for market direction, market reversal and market momentum

What is Ichimoku Kinko Hyo?

Ummm... This indicator looks as confusing as the name suggests... It contains a number of moving average overlays, including a cloud overlay, which is referred to as the Ichimoku Cloud. 

How to trade Forex using Ichimoku?

When price is above the cloud, this can signal an uptrend. When price is below the cloud, this can signal a downtrend. 

The cloud can also be used for support and resistance. 

ichimoku kinko hyo
ichimoku cloud
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Higher Time-Frame Indicators vs. Lower Time-Frame Indicators...

Indicators are generally more reliable on higher time-frames, than lower time-frames. 

If you are day trading a strategy that is very indicator heavy, I suggest trading indicator signals from higher time-frames but executing on lower time-frames. This can create a more profitable way of trading indicators. 

Below are some examples of indicators from higher time-frames vs lower time-franes. It should be quite obvious that the higher time-frame provides fewer but more reliable signals...

Forex Moving Average
Forex SMA
Forex RSI
Forex RSI example

Download my FREE Technical Indicators PDF...

moving average capture.PNG

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