When taking a first glance at the currencies market, it might seem that trading in it is mainly chaotic, and those who succeeded to make profits are just lucky.
However, this is not true.
For a start, the Forex market has certain rules which define the behavior of different currency pairs. It is far from easy to take all of them into account when deciding on when to place an order. To calculate the best time for a trade, a trader does a solid research of the market, of the chart, and even of the current social, economic, or political events.
All of this becomes much easier when you use the best Forex indicators.
A Forex trading indicator is a tool that follows a trend and predicts its further behavior. Trading indicators are a part of the technical analysis. They are mathematical formulas which analyze the past price behavior of a currency and predict the most probable price changes and future trend directions.
Sometimes, a successful choice of a working indicator means that a trader is set with his or her own trading strategy. This is how important indicators are in Forex.
While some traders might confuse finding the best Forex indicator with freeing themselves from the necessity to work on a strategy, others know that this is just a start. In order to make profit and avoid losing money, everyone goes through development of a personal strategy on their own.
It involves a lot of testing and adjusting of certain indicators to their trading style. Nevertheless, when you trading Forex, the best indicator is a crucial and the most desirable tool in your arsenal.
The main thing that all best indicators for Forex do is provide the prediction of the future price based on the past price behavior analysis. That's in general. Other features of the best indicator for Forex are its simplicity and its clear purpose. In any case, "the best" means "the most suitable", not more than that.
"The best" Forex trading indicator you will choose should be good for you and the style that you are comfortable with. If you are looking for a universal thing that will guarantee you winning trades under any circumstances, then we cannot provide you with such.
You should understand that most indicators do not identify the entry and exit points. They simply provide you with an insight into a market processes which will give you a better understanding of how things work; they also teach you to identify the signs when it's best to open or close your position.
So, meet the best indicators for Forex trading.
Some might call SMA the best indicator for Forex, as it is one of those which are the easiest to understand. SMA stands for "simple moving average", and it is calculated by taking the closing price for several time periods, adding it, and then dividing by the number of time spans.
By plotting the results of such calculations on the chart and comparing SMAs for different periods, traders can see when the situation is favorable for buying or selling. There is a general rule that short-term SMAs are more responsive to the market changes, while long-term SMAs are less responsive.
When the two SMAs (a long-term and a short-term one) cross each other, then we see the crossover. The latter marks the best moment for placing a buy or sell order.
All types of moving averages are trend-following indicators, because they follow the past prices and allow making predictions based on the trend development up to the present moment. Just like SMA, EMA uses the price at a certain period of time. It stands for "exponential moving average" or "exponentially weighted moving average", as the calculation also involves a smoothing constant: 2/(1+time period). The entire formula looks the following way:
Current EMA = ( (Price(current) – previous EMA) ) * smoothing factor) + previous EMA.
The point is to weight the difference between the price at the current time period and the EMA for the previous period of time; the result is added to the previous period's EMA. The recent price would have more weight applied to it if the time period is shorter. This way, EMA is much more responsive to market changes over the shorter periods of time. While it is more complex to calculate than SMA, EMA is an indicator that's more useful for beginners.
The third most important trend-following indicator is MACD, or "moving average convergence divergence". Simply speaking, it plots the negative and positive differences between the 26-day and 12-day EMAs on the chart. The main benefit of MACD is that it not only indicates the trend, but also momentum; it allows traders to make predictions of the price movement speed (upwards or downwards).
SMA, EMA, and MACD together belong to the trend-following (or lagging) Forex indicators which depict the market trend in a graphical, thus very simple, way. It helps both new and experienced traders watch the price movements, predict the potential price behavior, and make decisions on placing buy or sell orders.
In Forex, where everything (market trends and price movements) is based on speculations and pure predictions, it is very important to have instruments that will help you to be on the same level as the rest of the traders. There are three best indicators Forex traders would choose among the hundreds of the existing ones.
They are Fibonacci retracement, Fractals, and Bollinger Bands. They are not just effective when it comes on analyzing the past price behavior and making predictions on the potential future price, but they are also simple and available for every beginning trader. All three of them use the chart and visualise the trends directions.
Let us look at each of them more closely and find out how they can be used to signal the profitable trades.
While not everyone shares the same attitude towards the Fibonacci retracement, it, nonetheless, belongs to the most proven best Forex indicators among the current trading tools.
Lots of currency traders across the globe rely on the evidence provided by this indicator when making a decision to open their position. Fibonacci retracement is a powerful instrument of the Forex technical analysis.
There is an interesting side to that: the more traders use Fibonacci to determine their actions, the more accurate this indicator turns out to be. Thus, the reliability and efficiency of this indicator is determined not by its accuracy, but rather by traders' belief in it.
In the simple words, Fibonacci retracement helps to determine the support and resistance levels and, subsequently, to point out the prospective reversal levels. This indicator uses the extreme points on the price chart and Fibonacci ratios (0%, 23.6%, 38.2%, 61.8%, 100%), by which the difference between the two extremes is divided.
This procedure allows to foresee the market's support and resistance levels, as any reversal of the trend is preceded by its partial retracement.
Another popular and well-trusted Forex indicator is called Fractals. The name comes from a mathematical concept, as well as its visual representation of a pattern whose elements repeat the whole pattern at smaller scales. In Forex, Fractals are used when trends are broken into smaller patterns which can be predicted more easily.
Just like the previous indicator, traders can use Fractals to foresee the reversal of the trend the bearish or bullish way. A Fractal pattern consists of 5 bars which are located together on the price chart. The first type of a pattern has a bar with the lowest low in the middle, and the higher lows are surrounding it.
In this case, a reversal to uptrend is observed. The second type of a pattern has a bar with the highest high in the middle, and the lower highs are surrounding it. In this case, a reversal to downward trend is observed.
The third among the Forex best indicators is the Bollinger Bands. It helps traders to foresee the potential short-term extreme prices with the help of standard deviation, as the latter is associated with the price volatility.
The Bollinger Bands are lines that are located one standard deviations from the SMAs each way (a standard deviation is both subtracted and added). When the upper and lower bands get closer one to another, this means that the volatility is low, and that it will be followed by a high-volatility period.
Also, prices that go beyond the Bands help traders to make successful buy or sell trades.
In this article, we have overviewed the most popular Forex trading indicators, three types of trend-following averages (SMA, EMA, and MACD), as well as a triad of special indicators: Fibonacci retracement, Bollinger Bands, and Fractals. They are so widely used in the trading-related materials that they should be familiar to every trader, including the newcomers.
Forex indicators help to visualise and analyze market trends and, subsequently, predict price changes. While some indicators can be beneficial for both long-term and day traders, the ones like Fibonacci are mostly used by short-term traders.
Still, there are no universal indicators which would come with a guarantee of high revenue.
To succeed in gaining profit, you should rather look for the best Forex indicator combination, which you will find yourself after learning about the most used indicators and utilising them in practice.