How to Use Technical Indicators to Improve Your Forex Trades

How to Use Technical Indicators to Improve Your Forex Trades

As an active Forex trader, you should understand technical indicators and their significance in improving your trading experience. Technical indicators are not a sure way to make money. However, they make things easier for you to assess market conditions and analyze your current and future positions. In this guide, you’ll learn what technical indicators are and how to use some of the most popular technical indicators. 

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What Are Technical Indicators?

Technical indicators are tools that help you analyze the charts. They can be based on mathematical, statistical, or sequential logic and are visually represented to make it easier for users to interpret them. There are several built-in indicators with the trading platforms. You can use them for free. However, if you have a very wild idea about having an indicator of your own, then you can hire a developer and get yourself an indicator. The role of technical indicators is to evaluate the markets and forecast the next move. These tools are not 100% correct. So, relying on them blindly is not an option. 

The technical indicators are based on historical price data, and it is assumed that history will repeat itself. Nothing wrong with it. But the moment you get a confirmation from your indicator, the price may have already made a significant move. That’s why indicators are categorized as leading and lagging. Most indicators are lagging as they reveal about the past. There are few leading indicators that clearly predict the future movement. However, the accuracy is subjective for any indicator. 

Top 5 Essential Technical Indicators for Forex Trading

Let’s find out how to use some of the widely used indicators in Forex. 

1. Moving Averages (MA)

Moving averages tell you the average price over a certain period. These are the most commonly used lines to find the current market trend and its strength. Look at the following chart of USD/CHF:

The purple line is the 50-period moving average. As soon as the price moved above the line, it turned bullish, and the trend shifted when the price moved back below it. If the current price and the moving average are too close, it shows indecision in the markets. Similarly, if the moving average line stays horizontal, it shows consolidation. 

The moving averages have different types like simple, exponential, weighted, etc. However, the simple moving average is mostly used. 

2. Relative Strength Index (RSI)

RSI is an oscillator that shows whether the market is overbought or oversold. These are extreme conditions where a prevailing trend pauses and shifts its direction. Let’s take a look at the chart:

There are three RSI values that are key to watch: 30, 50 and 70. The 30.0 level is oversold where the price is expected to stop the downside and move up. Similarly, 70.0 is the overbought level from which the price can take a downturn. The 50.0 level is a mid-point that indicates the trend. Like, if the value is above 50, it is a bullish sign while below 50 is a bearish sign. 

3. MACD (Moving Average Convergence Divergence)

The MACD indicator is also an oscillator. It has three parts. The zero line works as a pivot point. The histogram bar below the pivot point shows a bearish trend, while above the pivot point shows a bullish trend. The length of the bar shows the strength of a trend. Reduced size of bars shows a weakening trend, while rising bar size shows a strong trend. The third part is moving average, which overall identifies the trend. 

4. Bollinger Bands

Bollinger Bands is a volatility indicator which has three lines. The upper and lower lines form a range and predict that the price will reverse from the lines. The third line is the midpoint between the two extreme lines. 

The squeezed lines show indecision in the market and also point out a potential breakout of the trend. Wider distance between the lines indicates high volatility. 

5. Fibonacci Retracement

Fibonacci is another popular tool which draws key levels on the chart by picking the lows and highs. These levels act as potential reversal zones. Take a look at the following chart:

All you need is to point out major swing lows and highs. Connect these points from left to right. You will get the key levels on your chart. You can add more levels or customize them too. 

How to Combine Indicators for More Accurate Trades

You can place more than one indicator on your chart to create a confluence. More indicators mean higher accuracy. However, clustering your charts with plenty of indicators may confuse you. Not every indicator is useful. 

The pro tip is to divide your indicators into two parts. Primary indicators should tell you the next price move and secondary indicators may be used for the confirmation. For example, use moving averages as a primary tool and take confirmation from the Fibonacci. 

Common Mistakes Traders Make When Using Indicators

You could be prone to commit mistakes when it comes to indicators. Avoid the following:

• You should not overly rely on a single indicator. 

• Use more than one indicator for confirmation. 

• Never ignore fundamentals as they are the major market drivers.

• You may misinterpret the signals. So, take caution while reading the charts.

Conclusion

The technical indicators are helpful for the traders to analyze the markets. Some indicators are lagging and some are leading. The accuracy of indicators is subjective. You should test them on a demo account with different settings before running them on a live account. 

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