The success rate of a newbie trader in the forex market greatly depends on their strategy and skill level. The strategy is vital for spotting the best trading opportunities, and skills are essential for perfectly implementing this strategy or trading plan. Sometimes, new traders have a solid strategy to follow but fail due to a lack of knowledge and skills. Demo accounts are perfect for developing and enhancing your skills without any risk. Having the right amount of analytical skills is especially important to survive in the fast-moving currency market, and the best tools that you can rely on for market analysis are technical indicators. 

This article will introduce you to the top 5 forex trading indicators with which you can upgrade your skills and stay on the right track while trading. 

Reasons for the Popularity of Technical Indicators 

Before we move forward, you must be wondering about the reason behind the popularity of technical indicators in the forex trading community. The primary reason for the increased usage of indicators in forex trading is the preference for technical analysis over fundamental analysis. When you rely on technical analysis, you just have to monitor the price charts and recognise the trends by reading chart patterns. The Technical indicators are added to confirm these trends and get detailed information about the market situation. 

But when you decide to do a fundamental analysis, you will have to go through a vast amount of information and news which may influence and impact the currency prices. Fundamental analysis is suitable for traders who follow long-term trading strategies like position trading, and it also requires in-depth market knowledge and experience. 

So, those who follow short-term strategies like scalping, day trading, and swing trading may not be able to find the ideal trade setups with fundamental analysis as it does not provide to-the-point information about possible trends or potential price movements. In the end, you will have to look into the charts of a specific time frame and follow the price action. Also, most forex traders tend to follow price action strategies, and technical indicators can be a valuable addition to catch good trading opportunities. 

These days, trading platforms come with a lot of basic to advanced tools and indicators. MT4 has 30 indicators built into its platform, whereas MT5, an advanced version of MT5, has a lot more indicators, 38 to be exact. These platforms have a bunch of built-in technical indicators, and you also get the option to add custom indicators. In short, technical indicators have become easily available for all traders, again becoming a reason for their popularity in the forex trading world.  

Top 5 Technical Indicators that Forex Traders Trust   

  1. Moving Average indicator – When you are a beginner who is still learning about the market and technical analysis, it is best to start with something simple, and the Moving Average indicator can be an apt choice in this case. Moving Average or MA is the most commonly used forex indicator for spotting market trends. This indicator works by considering the averages of market movements for a specified period of time. 

Basically, the moving average indicator will allow you to spot the underlying trends by smoothing out the zigzag price patterns formed on the charts because trends will never appear that clear in a real scenario, making recognising real-time trends challenging for an average trader. But when you use the moving average indicator, you can spot trends with clarity and identify trend reversals in time. 

There are actually 2 types of moving averages: Simple Moving Average (SMA) and Exponential Moving Average (EMA). The Simple Moving Average stays true to the name as using them is pretty simple, whereas Exponential Moving Averages are a bit complex. But EMAs react quickly to price changes, whereas SMA shows slower reactions. You can either choose the best one between the two or use both of them together for a clearer picture. When the price is above the moving averages, you can stay on the buying side. When the price is trading below the moving averages, you can switch to selling, but make sure to use trading calculators to quickly find out when to enter and exit a trade. 

  1. MACD Indicator – MACD is the short form for Moving Average Convergence Divergence, another popular indicator used by forex traders from all parts of the world. The MACD indicator is also a moving average-based indicator, but it considers the difference between 2 moving averages, which can be seen from the MACD line. It also has a signal line which shows the moving average of the MACD line, and the difference between moving averages is shown with a histogram. 

The MACD line is more responsive and quickly reacts to price fluctuations, whereas the signal line is slower and reacts to price changes after the MACD line.  When the fast-moving MACD line shifts away from the signal line, it is referred to as divergence, and when they get closer to each other, it is said to be convergence. 

When you see a crossover forming in the charts (MACD line crossing signal line), this can indicate a new trend starting for the currency pair. The MACD indicator can not only reveal the direction of a trend but will also tell you about the strength of this trend. This indicator can also indicate the points at which the trend could reverse later on, which makes it a powerful tool for traders.

  1. RSI Indicator – RSI is an abbreviation for Relative Strength Index, a commonly used technical indicator in the forex market. As the name suggests, the Relative Strength indicator evaluates the market’s strength in real time by identifying whether a currency pair is overbought or oversold. An overbought pair means the market has more buyers (going long on the pair), whereas an oversold situation happens when the market has more sellers (more traders shorting the pair).   

The readings of the RSI indicator are on a scale of 1 to 100, where a reading of 70 and above tells the pair is overbought, and if the scale stands at 30 or below, then the pair is oversold. Traders have different interpretations for the overbought and oversold scenarios, but generally, a currency pair is overbought, which indicates the trend may become weaker, and the price can drop. But some traders also see this as an opportunity to short as the uptrend is reversing. 

Similarly, a currency pair being oversold may indicate the uptrend becoming stronger with a further rise in price. In a downtrend, the traders may interpret the oversold scenario as a signal for an upcoming trend reversal, ending the downtrend as a bullish signal (signal to buy). Another popular indicator that shares similarities with RSI is the stochastic oscillator. 

  1. Bollinger Bands – Bollinger Bands is also quite common in the forex market as this is an advanced indicator compared to other indicators we discussed. Basically, the Bollinger Bands are used by traders for drawing trend lines on the chart. The Bollinger Bands has an upper and lower band, away from the 21-period SMA (Simple Moving Average), with a difference of 2 standard deviations.  

Bollinger Bands come in handy for assessing the market volatility as the widening of bands suggests high volatility, and the narrowing of brands indicates low volatility. Bollinger Bands is an indicator that allows you to determine the perfect time for entering or exiting a trade position, making it a popular tool among forex traders. 

  1. Average Directional Index – The last one completing this list of top 5 forex trading indicators is ADI or Average Directional Index. This indicator closely follows market trends and tells you the strength or weakness displayed by the currency pair’s price fluctuations. The values of ADX range from 0 to 100 if any value below 20 suggests a weak trend. The ADX readings will be above 50 if the trend is solid enough. 

In short, you must look for higher numbers on ADX to trade a strong trend. A low value on ADX can suggest a possibility of choppiness or sideway movements for the currency pair. Now, one limitation of ADX is that it does not tell anything about the direction of the trend, and you will have to rely on some other indicator along with ADX to recognise the type of trend happening. 

Conclusion

Using simple yet powerful indicators can make the analysis part of trading easier for you. But you should make your charts manageable by adding fewer indicators, as that would only confuse the end. So, take your time to learn about various indicators and choose the one that fits well with your strategy and trading style. Technical indicators help us upgrade our trading skills, but you also need to spare some time for practice. Let’s start with simple indicators like Moving Averages and RSI before moving to advanced ones like Fibonacci retracement levels.