Indicators are the best friends of those forex traders who believe in technical analysis. There are 2 types of analysis, one is fundamental and the other is technical. Those who swear by technical analysis have to rely on charts and indicators to study the history of the price action and determine where the price will go next. Of course, this is not an easy job and this is made even more difficult by the fact that there are literally thousands of indicators out there. Some of the indicators are given out by various trading platforms while some others are developed or customized by the traders themselves to suit their specific strategy or trading needs. But there are some standard methods and indicators which are time tested and which are used by so many traders that many of them have started to become self-fulfilling.
Selecting the Best Indicators for Active Forex Trading
Like everything else related to FX trading, the best indicators for forex trading depend purely on the individual trader. What works for one trader may not work for the other and vice versa. So the trader must try out many indicators across the instruments and the markets that he is planning to trade and does a thorough analysis of how the indicators work for their set of instruments before deciding to use a specific one in due course of time.
It is not very easy to zero in on a specific indicator as it requires a lot of time and analysis but if you do manage to find a few, then we are sure you will be able to make full use of the same. You have to remember that the best indicators are not those that will be right every time. The reason is that there are no indicators out there that will be right every time. Indicators are only tools that help you trade in a better manner and help you to make better decisions. They can never replace your trading and money management skills. You have to remember that it is your risk management that will well and truly set you apart from the others and irrespective of what indicators you find and how they fit into your strategy, you need to always make sure that you use the right money management skills so that you can stay in the game for the longer term.
Best indicators are those that generally flow with the market and give you signs of impending change in the market. Do not try to fit your indicators into small timeframes. Start with larger timeframes and as long as you can find good indicators that work in the larger timeframes, you should be safe in the long run. The indicator should be able to tell you changes in direction of the market and at the same time, it should not be changing its direction every few minutes as this might confuse you and push you into making wrong decisions and also place you under a lot of pressure.
The Best Technical Indicators for Day-Trading
The best forex indicators for day trading are the standard ones which are the RSI, Stochastic as well as moving averages. What is special about them? Maybe nothing at all. They are good for the simple reason that it is used by a lot of traders all around the world for years together and so many traders believe in them and they have become self-fulfilling. If thousands of traders in the same market see the RSI crossing 80 for a specific ind=strument at the same time, they would all be tempted to sell it at the same time which means that the RSI already has started to work! This is true for the other indicators like Stochs and moving averages (especially the 100MA and 200MA as well ) which are also used by lots of traders across a lot of instruments as well.
At the same time, a lot of traders use common price action techniques like support and resistance or Fibonacci indicators to predict where the price is going to go next and that is why we see these working as well many a time. But we have to clearly remember that these indicators do not work all the time. So you need to mix up a few indicators and when one indicator, like the RSI shows the signal, you would probably need to wait for confirmation from another one, like the Stochastic before you start taking the trade. This confirmation from multiple indicators always ensures that the signal is very strong. Of course, waiting for confirmation from multiple indicators would mean that you might lose on certain good trades but at the same time, it will make sure that you will be inside the best trades that are possible. Of course, there are no hard and fast rules on how you should combine these indicators or how you can trade with them overall and it is more of a trial and error method to find out what settings and strategies and combinations suit your trading style the best.
How to Use the Best Forex Volume Indicators
Another famous indicator that many traders use is volume. This is basically nothing but the total quantity or volume of the instrument traded within that specific time frame which could be M1 or M5 or even a week. Many theories are surrounding the volume and each exchange has its own volume and it can be interpreted in a variety of ways. But it must be remembered that as far as the FX market is concerned, there is no single central authority that controls it and the volume is distributed all around the globe and several banks, liquidity providers, exchanges and brokers and so the volume that you see on your platform may not truly indicate what the actual volume is as it shows the volume only in your platform and not across the globe.
This is likely to mislead the traders and hence this has to be used carefully. The best approach would be to use the indicator over a period of time and find its own patterns as far as your trading platform is concerned and then try and form the right strategies around it just like how you would use your relative strength indicator or any other such indicator for that matter. Once you have become familiar with the volume patterns and how price reacts to those changes and patterns most of the time, you will be able to form a strategy around it and make use of it while trading. Volume is one of the most powerful indicators in the stock markets and though the FX market is very different and volume data has much less relevance, it could be used as a tool if you know how to work it.
Are Forex Indicators Reliable?
Now that you have learnt which are good indicators and how to make use of them, the next natural question would be how effective they are. Are they as good as they are advertised to be and can they be relied upon during difficult times and all those questions would rise? Let us make one thing very clear though. Indicators are not a magic wand or a magic ball that they amazingly and automatically tell you what is going to happen in the future. If you expect that from the indicators, then it is high time that you quit trading. Most of the indicators out there is just a mirror to what has happened in the past and most of the strategies revolve around the fact that history repeats itself.
The indicators can only be used as a supplement and an added tool to your trading arsenal and it is not something that can be totally relied upon 100% of the time and this is true for any indicator that is in use. By increasing the number of combinations of indicators or by using multiple signal confirmations and confirming that with your own experience and analysis, you can improve your chances of success manifold but still that does not guarantee you full success as a trader at any point in time. Make sure that you always believe in your own analysis and your experience is also likely to be the key to your success. Another important factor is your risk management strategy and it is only after all these, that the indicators come into the picture. If the other factors are not properly aligned by you, then the indicators alone cannot make much of a difference to your trading. Many indicators are not very accurate and some of them repaint as well. You need to be aware of all these pitfalls and make sure that you chose the right ones for your trading.
How to Use Forex Trend Indicators
Many traders, experienced ones at that, would tell you that the trend is your friend. This trend might be for the day trading or it might be for the short term or the long term as well. Irrespective of the time period, as long as you are on the side of the trend, your chances of success are multiplied several folds and that is why traders generally advise to use trend indicators like the RSI, Stoch and moving averages in the long term, determine the trend and then look to take trades using the short time frame and ensure that your trade always aligns with the overall trend.
Of course, this is easier said than done and it could also lead to a situation where the trader would have to wait long for signals and also might have to miss many trades and this could increase the stress and frustration. But the experience would teach the trader to wait for the right trade so that all the stress would be only before taking the trade while the actual trade would go very smoothly and exactly according to plan. This is what all traders would want ultimately.
Be careful in choosing the right indicators for finding the trend as this could make or break your trading in the long run. Do a lot of backtesting and make sure that you backtest at least for 6 months so that you are sure that you have chosen the right trend indicator. Once you are confident of the indicator and are also sure that you know what patterns in the indicator lead to what kind of results, then you can start with a small account with money and then use the same thought process and pattern identification to make sure that you take the trades in the direction of the trend as per the indicator. The more trades you make over a period of time, the more familiar you will become and this helps to improve the confidence in your trading.
Indicators are very good tools for new and experienced traders and just like any other tool, the way that you use them is likely to be the difference between success or failure for any trader. These tools and indicators are commonly available for all traders but it is how you make use of them that matters as there are millions of different ways that you can use them for your trading during the long term.
Like in any type of trading, it is always advisable for the trader to find out through his own experience what indicators work for him and which are the ones that he is comfortable with. Many traders choose the usual indicators while some traders find that those that are not commonly used are the ones that fit their trading style. Still, others look at the market conditions and they write their own indicators and use them for their trading. There are literally many ways to make use of the indicators and the trader needs to understand how each indicator works, carry out backtesting on all those indicators which he believes in and then he will be ready to start using them in his own trading in due course of time. Again, it is important to remember that these indicators are not the solution to all your trading problems and it is only the indicators combined with the trader’s talent, intuition, money management skills, patience, a consistent improvement on the skills that are required for trading and trading knowledge that is going to help the trader to become a successful one in the future as well.