Mastering Forex Trading Indicators with Orbex Education

Most strategic FX traders consult a combination of technical, fundamental and market sentiment indicators before making a decision to enter a trade. Several technical indicators, when used correctly, can be deemed very worthy especially to beginner FX traders, and those are the most commonly used.

Some of the best Forex indicators to use in Forex trading are analysed in this infographic. A Forex indicator should allow you to make better-informed decisions on which trading strategy may be most suited to your Forex trading requirements or even to your trading style.

Key Technical Indicators For Forex Trading

Technical indicators are primarily used to generate Forex trading signals, as well as to indicate the direction of the prevailing trend, the level of its momentum and other market characteristics useful to FX traders. Such indicators are computed from Forex market data, like the exchange rate, trading volumes and the open interest.

Trend indicators give traders an idea of the direction a currency pair is moving. They are usually superimposed over the exchange rate chart.

Trend indicators

Moving Averages – A lagging Forex trading indicator that smooths exchange rate movements by taking an average over a given time period.

Bollinger Bands – A set of bands often plotted two standard deviations up and down from a central moving average that acts as a trend and volatility indicator.

Williams Alligator Indicator – A set of three smoothed moving averages of different time periods shifted into the future by several candlesticks and used to generate trading signals.

Parabolic Stop And Reverse (SAR ) – A series of indicating signlas drawn either above or below the exchange rate and show when market momentum is changing direction.  Ideal for market reversals.

Oscillators

Oscillators are usually displayed in an indicator window at the bottom of your MT4 charts. Some oscillators, like the RSI, are bound to move within user-selected overbought or oversold areas, while others like the MACD don’t.

Relative Strength Index (RSI) – A strength oscillator that compares the size of recent gains to that of recent losses observed over a particular time period, usually 14.

Average Directional Movement Index (ADX) – A trend strength lagging indicator computed over a number of periods that uses positive and negative Directional Indicators (+DI and –DI) to generate trading signals.

Moving Average Convergence Divergence oscillator (MACD) – An unbounded momentum oscillator that computes the difference of two moving averages (usually the 12 and 26 periods) and plots it in a graph against a moving average of 9 periods. This indicator fires signals on crossovers or crosses above and below the zero lines. It includes a histogram, and that can provide FX traders with information regarding bulls and bears.

Williams Percent Range (%R) – A momentum indicator that uses an upside-down scale over a period to identify overbought and oversold levels. It makes a good reversal indicator as it usually turns direction before the price does.

Stochastics Oscillator – A bounded momentum indicator that compares a closing exchange rate to its range over a particular period of time. It then computes its %K line, which is then compared to its MA – as seen as %D line – to generate trading signals.

Momentum Oscillator – An unbounded indicator that measures the rate of change in an asset’s price to determine the market’s trend strength. It is used to identify probable market reversals at extreme points or when divergence exists.

On Balance Volume – An unbounded indicator that compares trading volumes to exchange rate movements to measure accumulation and distribution levels. It is used to indicate breakouts as well as reversals.

Key Fundamental Indicators For Forex Trading

Fundamental indicators are used to determine how healthy a country’s economy is and how that might affect the relative value of its currency. You will often find an economic calendar being used to follow such releases. During an economic event, or after the event’s release to be more precise, markets react most when the actual result differs significantly from what was expected.

Fundamental Indicators

Central Bank Monetary Policy Decisions, Rate Statements and speeches )– Those indicate the likely direction of benchmark interest rates set by central banks.

Employment Numbers (Payrolls, Unemployment Claims, Unemployment Rate) – Employment data indicate the level and health of the jobs sector of an economy and they are a critical part of business confidence and consumer spending.

Gross Domestic Product (GDP) – Shows the value of what an economy is producing.

Trade Balance – Shows how much of a deficit or credit an economy is running with its trading partners.

Retail Sales – Indicates how much consumers are spending and on what items.

Consumer and Producer Price Indexes (CPI and PPI) – Inflation indicators that show how much prices are rising. They are used as a reference point by central banks to determine whether interest rates are supporting economic health.

Purchasing Manager Index (PMI) and Consumer Confidence surveys – Economic sentiment surveys that are considered as leading economic indicators.

Key Market Sentiment Indicators For Forex Trading

Market sentiment indicators like the Commitment of Traders (COT) report shows the number of institutional and retail FX trades participating in a currency futures short or long contract.  The open interest shows the size of open futures contracts in a particular currency, while trader’s sentiment surveys ask participants about their market views.  Such sentiment indicators are especially useful when they approach extreme levels that have previously resulted in market reversals or breakouts.

Commitment of Traders (COT) report – The COT report is released on a weekly basis by the CFTC indicating how different types of futures traders are positioning themselves in the futures market.

Futures and Options Open Interest – The total number of exchange-traded derivatives contracts that have not been closed out.

Trader sentiment surveys – Those ones are performed using various polling techniques with a goal to extract the market’s sentiment.