The best forex indicators review – never underestimate the classic tools

On September 4, 2012 | By | In Forex tips

I would like to talk about the technical indicators in forex trading market that are the least lagging and misleading with the highest chances for correctly predicting the market.

In currency trading world there are various forex indicators, tools, automated systems, etc. that are meant to help a trader trade successfully and predict the currency move as precisely as possible. There are indicators that have been used for more than a few decades and they still surprise us with the simplicity and effect they make on a traders portfolio. There might be some new ones that have been created just a few years ago. Anyway, it doesn’t matter what’s their age or even their complexity, the most important factor is the ability to predict the future price move with the smallest failure rate. After having traded in forex market for over 6 years, I can say that I should have avoided using most of the indicators. My trading strategy shouldn’t have been used with certain price indicators, but I only knew that at the cost of my capital.

Like I said, the essence of every forex indicator or tool is to predict the future with reference to the past price behavior. In other words, if the price moves in a certain way, most likely it will move again in the same manner and the indicators are supposed to show the future movement in the best possible way.

Forex indicators can be misleading
Very often the signals of currency market indicators are confusing, misleading or lagging in time perspective. As you know, the best features that describe a good and reliable forex indicator are precision and time. The higher the number of accurate and successful signals of an indicator – the better. The same notion is applied for time – the earlier the signal – the better. So the best forex indicators are:

1 – Moving averages

These could be roughly classified to simple moving averages and exponential moving averages. Simple moving average

Simple moving average is calculated by adding the closing price of a currency pair for a certain number of time periods and dividing the total number by the number of time periods. To put it shortly – it is the price of a currency pair over a certain fixed period of time.

Exponential moving average is almost the same, except more weight is given to the latest time data, thus it should be used in smaller time patterns. Overall, moving average indicator gives you a clear view of the present market trend.

Moving averages are best used as forex trend indicators, since you can identify a future price direction, thus receiving a signal Exponential moving averagewhen to buy or sell. For example, the price above moving average is a signal to buy, below moving average – to sell. I usually use 200, 100, 50 and 25 period simple and exponential moving averages. Long term investors usually use 200 or 100 moving averages on daily or weekly charts, which means that price trends don’t change very often. Short term traders and even scalpers mostly use small 5 – 15 minutes or hourly 10 or 20 exponential moving averages which are the best forex scalping indicators. Moving averages are best used in trending market conditions, because they clearly show the resistance or support trend lines, which gives the possibility to sell or buy whenever the price touches those lines. Long term moving averages shouldn’t be used in a ranging market, it’s better to switch to 30 or 15 minutes time frames and look for short intraday trends using the same technique. The intersection of small time period and long time period moving averages (daily and 4 hour for instance) is usually a strong signal that trend has changed. Here is an example in the picture.

2 – Forex chart patterns
Technical chart patterns are best used when there is no news release.

The most important ones are:
1. Head and shoulders. A currency price chart pattern, where the price rises to a peak, declines, then rises above a former peak and declines again. Finally, it rises to the level of the first peak and declines. In this way we have the so called head and shoulders figure. When the price falls lower of the neck line level (the line can be drawn from the two lowest valleys or points of the formation), we usually have a sell signal. The same principle applies to the inverted head and shoulders, when the price goes up and it’s time to buy.

 

2. Double top or double bottom. The price rises to a peak, declines, then rises again to the same almost exact level and declines again. The entry signal (short) is the second peak. The same principal, only in the inverse manner is applied the double bottom. This indicator is best used in a flat price movement.

 

3. 123 indicator. It’s very simple, classic and very strong trend movement signal. If we want to buy a currency we must wait for the price to rise to a peak, decline without reaching the last low level and then rise again above the recent high. That’s a signal to enter buy (long) trade. The trade entry is placed above the last high, with stop loss below the last low.
There are also W, M, flag formations, but let’s review just the basic ones.

 

4. Trend lines and channels. Those are also chart formations; you just have to identify them yourself. They are used in the upward or downward trend movement by drawing lines from the first low to the last low of the last time period. The opposite is drawing the line from the first high peak to the last hight peak of the last time period. They can be identified and used in a short term (even 1 minute) and long term trading and I suppose forex trend line strategy is used by a big number of traders. Benefiting from it is another side of story. If you want an example, just take a look at the picture, I believe it explains everything. Trend line indicators are mostly used in currency trending conditions.

 

5. Support – resistance levels. This is a term used by technical traders when referring to specific price levels that have stopped the price movement and made it reverse. They are used in a flat, ranging market as well as in a price breakout strategy. When a support or a floor of a price is broken and the price falls lower than two or three or even more support levels that have been formed in a long period of time – this is a strong sell signal. After the floor has been broken and the price goes to new lows, the floor or support usually becomes the resistance or the ceiling. As for me – they are the most effective day trading indicators.

 

6. Flags and pennants. They are called so because of a price movement patterns which look exactly like flags or pennants. They indicate the consolidation and continuation of a previous sharp and volatile price movement. They are identified in trending market conditions without much difficulty, by drawing two trend lines from the resistance and support. Bullish flag or pennant means breaking the resistance line and going upwards, while bearish pattern usually breaks the support and goes downwards. Trading flags and pennants requires extra caution and careful risk management, because they occur only in certain market conditions and may serve as false trading signals otherwise.
Other indicators
Candlestick chart patterns, Fibonacci numbers and Elliot Waves are also important, and I will cover them in the future. In the meanwhile, afore mentioned forex indicators are to be used wisely, never overestimating their role. The important rule to remember – all those indicators could be broken, do not rely on them 100%, and use at least 3 of them while trading.




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