Best Forex indicators 2022
Successful forex trading can be tricky. But that doesn't stop millions of us from trading every day. This is why forex indicators are critical.
Fortunately, there are many tools available to help us make such difficult decisions. Indicators and charts provide insight into Forex market price trends, market sentiment and price history.
As you can imagine, access to such useful and detailed information provides traders with insider knowledge when it comes to broader perception of the market.
In this guide, we'll take a look at the top 10 forex indicators available and how you can use them to take your trading results to the next level.
Before you even think about online Forex trading, you need to add the best indicators to your strategy.
When you include indicators in your trading strategy, you are analyzing information from the past and present. You'll find this in metrics like lag and lead.
As we have said, the best Forex indicators give traders the opportunity to fully explore information such as: market performance, historical and current price data, market sentiment and volumes.
All in all, technical analysis in general is an important part of successful Forex trading. So, for clarity, the main components of technical analysis are:
- Dynamics/volume indicators.
- Moving averages.
- Chart templates.
- Price trends.
- Support and resistance levels.
The best Forex indicators are a key element in predicting market sentiment, among other factors, when trading foreign currencies.
By using the available technical indicators, you have a much better chance of successfully trading in the Forex market. This brings us to our top 10 forex indicators, all of which you can add to your own currency trading strategy and more.
1 - Relative Strength Index (RSI)
Starting with the Relative Strength Index, commonly referred to as RSI for short, this indicator is a popular form of technical analysis used by traders around the world.
For those who don't know, RSI is classified as an oscillator and is one of the best trend indicators on our list. Traders use RSI to know when an asset is in overbought or oversold territory.
This oscillator is also great for illustrating hidden and explicit divergence signals in the forex market.
In a nutshell, RSI is a quantification of a losing close compared to a profitable close, displayed as a percentage that will range from 0 to 100.
The calculation looks like this:
We mentioned that RSI indicates momentum in the financial market. Thus, indicators of this type are used to calculate the speed of Forex price fluctuations.
Simply put, momentum indicators are a measure of short-term trends. Illustrating the resilience and general condition of the aforementioned price fluctuations is when both “oversold” and “overbought” signals are generated.
As shown, the RSI displays a value between 0 and 100, which changes with price fluctuations.
Below are explanations for both points:
If the RSI value is above 70, this indicates that the security is in the overbought zone. If the RSI value is below 30, this indicates that the security is in the oversold zone.
So what is an overbought signal and why is it useful? An overbought signal tells you that the currency pair you are interested in is overvalued.
This usually follows a period of time when the asset was on an upward trajectory. As you probably know, the price cannot move in one direction for too long without reversing.
Thus, the RSI gives you a much better chance of predicting when a reversal might occur. For example, if the RSI has risen above 70, this may indicate that a price decline is imminent.
Therefore, if you interpret the formation of a trend as a sign of a coming reversal, you can sell and lock in your profits.
On the contrary, if you see an oversold signal, the opposite is likely to happen. This may give you an indication that you should "go long".
2 - Moving Average (MA)
Forex, especially in the short term, involves tracking the latest price trends.
The moving average (MA) is one of the best forex indicators because it recognizes the direction of the price trend. While also removing the additional noise of short-term price fluctuations.
The MA calculation can be of great help to you in identifying current and emerging trends. A moving average basically finds averages using mathematical equations and uses the data to identify trends.
The governing body determines the above price trends and averages. And evens out the price action, removing the hindrance of sharp short-term price changes.
Most forex traders use multiple timeframes to create moving averages. The most common moving average timeframes are usually the 50, 100 and 200 day moving averages.
Although the MA is a fairly rudimentary technical analysis tool, it is without a doubt one of the best forex indicators, due in large part to its simplicity.
Moreover, the moving average indicator can be adapted to any time frame. Not only does this allow you to view trends, but it also gives you insight into the direction of the asset and the average client price.
When there is a downtrend, the MA can function as a ceiling or "resistance" so to speak. In contrast, in the middle of an uptrend, the average acts as a "support" or base.
It should be noted that due to the fact that MA can be calculated for any period. You can use it to predict short term and long term trends in the Forex market.
If you want to calculate AM yourself, just add all the numbers together and then divide that number by the appropriate values.
Let's say you want to calculate a moving average over a period of 2 years. Add up all the numbers for the period. Divide the total number by 2.
Using multiple subsets of the data, the GA finds the average. And best of all, you can use it in combination with chart analysis.
As already mentioned, this forex indicator is a handy tool for determining resistance and support levels. At the forefront are two types of MAs, the "simple moving averages" (SMA) and the "exponential moving averages" (EMA).
The SMA offers information on all stocks, with the latter focusing on the latest prices, which we will discuss in more detail shortly.
3 - Convergence-divergence of moving averages (MACD)
MACD is another popular tool on our list of the best forex indicators. This identifies changes in speed obtained by comparing two moving averages.
By adding this forex indicator to your trading strategy, you will be able to recognize potentially profitable trading opportunities near resistance and support levels.
For those who don't know, "divergence" means that the two moving averages are moving away from each other. At the same time, "rapprochement" shows that they are approaching.
Take a look at a simple explanation of the composition of the MACD indicator:
- Signal Line: It illustrates changes in price momentum and also acts as a trigger in terms of sell and buy signals. The signal line is a 9-period MA MACD.
- MACD Range: This line calculates the difference between two moving averages. The MACD line is formed by subtracting the 26-period MA from the value of the 12-period MA.
- Histogram: This line calculates the contrast between the signal line and the MACD. Only the signal line and the MACD line are used to calculate the MACD.
MACD is represented by the so-called "histogram". You will see the contrast between the signal and the MACD lines.
This can be considered a sell signal if the MACD crosses the signal line from above. If it breaks from below, you can use it as a buy signal.
This forex indicator is simple and reliable. You can see not only the strength and potential reversal point of the trend, but also the strength of the sell and buy signals.
This makes the MACD one of the best forex indicators for traders of all experience levels when it comes to modern illustration of market sentiment.
4 - Exponential Moving Average (EMA)
As we mentioned earlier, EM is useful for spotting trends though. This particular indicator is more focused on recent price data. Thus, some people refer to the EMA as an "exponentially weighted moving average."
In the short term, the most commonly used EMA trend indicators usually have a period between 12 and 26 days, or in the short term between 5 and 20 minutes.
When choosing a long-term strategy, traders usually use indicators from 50 to 200 days. It is important to note that you can use the EMA along with some of the other indicators on our list of the best forex indicators to check for noticeable market movements and evaluate their validity.
5 - Bollinger bands
Bollinger Bands is one of the best forex indicators, illustrating the price range in which a financial asset is usually traded. Simply put, this indicator is a statistical chart that displays the volatility and prices of a currency pair over time.
The closer the “bands” are to each other, the lower the volatility of the instrument is considered. Therefore, the further apart the bands, the higher the volatility should be.
If a currency pair is trading outside of its "average" trading levels - Bollinger Bands will tell you. This is especially useful when trying to speculate on long-term price fluctuations.
If the price repeatedly crosses the upper band, this indicates that the financial asset may be in the overbought camp. If the price is below the band, this indicates that it may be in the oversold camp.
The availability of tools to predict potential overbought or oversold assets is invaluable in predicting when to enter or exit the market.
6 - Cloud Ichimoku
Let's say you want to examine historical prices as well as current price action in order to highlight higher probability trades. In this case, the Ichimoku cloud can become one of the best forex indicators to work with.
Like some of the other forex indicators on our list, Ichimoku Cloud highlights resistance and support levels for forex traders.
However, on the contrary, it also evaluates the price momentum, subsequently offering forex signals to help you in your decision making process. Traders who like a chart filled to capacity with information flock to this particular indicator.
Interestingly, in Japanese, "Ichimoku Kinko Hyo" actually translates to "One Eye Balance Chart". Because it offers a wide range of information in one place.
The indicator predicts current and future resistance and support levels. As well as determining market trends and the direction in which they can move.
To clear the fog, below is a breakdown of the 5 indicators. The Ichimoku cloud indicator consists of:
- Senkou Span A: This line is colored yellow and is called "Main Range A". The main step A is an intermediate point between Kijun Sen and Tenkan Sen. The line is projected 26 periods ahead and is calculated as Kijun Sen plus Tenkan Sen divided by 2.
- Senkou Span B: This line is often colored blue and is referred to as "Main Span B". The main range B is the moving average of the middle of the previous 52 periods. The line is designed for 26 forward delays. The calculation goes like this: the 52 period high plus the 52 period low divided by 2.
- Tenkan-sen: This line is usually colored red and is also called the "conversion line". Tenkan-sen is built as a moving average of the midpoint of the previous 9 periods.
- Kijun-sen: This line is usually white and is called the base line. Kijun-sen is built as a moving average of the midpoint for the previous 26 periods.
- Chikou Span: This line is green and is often referred to as the "delay span". Traced 26 periods in the past - senkou span creates a "cloud" contour. If senkou span B is less than span A, then the cloud will be green. If A is higher than B, the cloud is usually red.
As seen above, by reading the Ichimoku cloud indicator, you can follow the "weather" of the markets.
To further simplify:
If the cloud is red, there is probably a bearish trend. The green cloud tends to illustrate a bullish trend. A thin cloud usually shows you that the current trend is down. The larger the cloud, the stronger the trend.
7 - Stochastic oscillator
The stochastic oscillator is classified as a momentum indicator. It compares a specific closing price and a price range over a given period.
We believe that the stochastic oscillator is one of the best forex indicators due to its high level of accuracy and simplicity.
This is another indicator on our list that shows when an asset is in the overbought or oversold zone.
If the reading is above 80, you are looking at a market that falls into the overbought category. If the value is below 20, it usually indicates that the market is oversold.
Note that if the trend looks really strong, it doesn't necessarily mean that a market correction is imminent, so be careful. Again, this is why you need to combine multiple forex indicators to confirm your results.
However, the Stochastic Oscillator offers powerful buy and sell signals, which is incredibly useful when trading Forex. The forex indicator also works very well with RSI.
8 - Fibonacci retracement
The Fibonacci retracement is our best list of forex indicators because it helps traders calculate market “pullbacks” (or temporary breaks in a trend).
Pullbacks often create buying opportunities for traders looking to follow an uptrend. Essentially, the Fibonacci retracement is a drawing tool that allows you to measure partial reversals in the markets.
This forex indicator can be used in many different phases of price action using different retracement levels. Each level measures the percentage that the market moved between two different points.
The indicator levels are usually as follows:
- Between 23.6% and 38.2% for a "shallow correction", indicating a fast and strong trend.
- Between 61.8% and 78.6% for a "deep retracement" - markets with a strong trend but at a slower pace than a shallow retracement.
You can use the Fibonacci retracement between two important price points, such as a high and a low, by creating levels between the two points.
It would be better to create a stop loss order below the previous price move at the bottom of an uptrend - and increase than the previous price move at the top of a downtrend.
When it looks like there is an uptrend, you can use the Fibonacci retracement to estimate how much of the last big rally has been lost.
In general, the Fibonacci retracement is one of the best forex indicators to determine when to enter the market. You will also have a better understanding of where to place stop loss and take profit orders.
9 - Average direction index (ADX)
The Average Directional Index, or ADX, is another tool used by many forex traders to determine the potential strength of a particular trend.
One of the hardest things about trading forex or any other asset is to correctly predict the direction of a trend. There are 3 indicators in ADX including ADX direction indicator (black), positive (green) and negative (red).
The positive and negative aspects of this tool indicate whether the trend is weak or strong. The ADX ranges from 0 to 100. Anything above 25 tends to indicate a stronger ongoing trend.
Based on a moving average and typically covering a 14-day period, ADX focuses on the strength of a trend, not its direction. If the green line (positive direction) is above the red line (negative direction), the trend is likely to be strong.
You are not required to calculate ADX within 14 days. Because the schedule can be adapted to offer more or less depending on the price range.
10 - Standard deviation (SD)
The standard deviation is a calculation of the variance. This tool made it to our list of the top 10 forex indicators mainly because it is used in conjunction with other indicators. This can really help traders make more informed choices.
This particular technical analysis tool sheds light on market price volatility. And we believe that you should include it in your trading strategy.
The SD math formula will help you enter the market at the right time, not to mention detecting trend reversals and setting trading targets.
This forex indicator is quite simple for beginners. But powerful nonetheless for all skill levels. The standard deviation is also a useful tool for better risk/return management.
Below is an overview of the standard deviation calculation:
Find the "average closing price" for the period you are interested in, for example, 20 periods. Look at the spread for each period - this is the closing value minus the average price. Find a square for each gap, then add those gaps to the square. Divide the number of passes by the amount received. Then calculate SD as the square root of the value obtained in step 4.
As we have already said, this indicator calculates how much prices have deviated from the average. When it comes to timeframe settings, many people choose the default value of 20 periods, which is in between the extremes.
However, having a forex indicator giving too many signals can only complicate things. And thus affect the profits you can make.