First of all, there is no such a thing as “Forex Indicators”. Forex doesn’t have any special indicator. All the indicators you see, have been invented by the professional stock traders. However, almost all of these indicators, at least as far as I know, can also be used to trade the other markets, including Forex.
There are so many indicators that their developers and investors believe that they are the best. Novice traders think that indicators are some magic prediction tools. But the fact is they are all taken from the price. So it is the price movement that is the first and most important indicator in any market, including Forex.
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What Are the Best and Most Important Useful Forex Indicators?
There are so many professional traders who use nothing but the price movement. Some of them even don’t use candlesticks or bars. They use simple line charts and trade based on the fundamental, price actions and support/resistance breakouts. They believe candlesticks or bars, make the work too complicated. I have seen so many good, professional and consistently profitable traders among them and I strongly believe what they say is true.
1. Line Chart
So the first Forex indicator is the price line chart. If you want to learn how to trade, I suggest you to take a look at the price chart and try to understand what it means first. Plot the support and resistance lines and levels and see how the price has reacted to them, both before and after the breakout. That is the best way to understand the price movement:
Some other traders believe that the price is not an “indicator”. An indicator has to be calculated based on the price to give more data using the price movements. For example a moving average can be known as an indicator.
I don’t care about these kinds of definitions and rules. I care about the things that are important and make a difference. While I believe that the price is the first and most important indicator both in stock and Forex trading, I believe that you can use some more tools like candlesticks or bars that help you have a better understanding of the price movements.
2. Candlesticks and Bars
Candlesticks are very strong tools. I don’t care if they can be known as indicators or not. Something that matters is that they give a lot of invaluable information about the mentality of the markets main participants. They can tell you who has taken the market’s control at the end of a period or time-frame. And, this is very important to take a proper position, or stay away from the market, during the next period.
Bar chart also gives the same information as the candlestick charts. But most traders prefer candlesticks because they are easier to watch, analyze and digest, just because of the special shape and appearance they have.
So, after the line chart, candlesticks are the best Forex indicators. They are specially the best for Forex traders because the Forex market is so liquid and continuous. Price gaps make using the candlesticks a little harder. While you see so many price gaps on the stock market, there are usually very limited gaps on the Forex market sometimes because of the weekends.
We have so many articles focused on candlesticks on this website. I recommend you to read them carefully.
A trader has to use one of the charts I explained above. You either have to use the line chart, or candlestick and bar chart. That is the base of trading and technical analysis.
However, some traders are used to add some other indicators to their charts. Many of these indicators are also very useful, but many of them are nothing but more confusion and headache. There are some indicators that repaint and redraw when the price moves. There is no doubt that you have to avoid these kinds of indicators.
3. Bollinger Bands
After the line or candlestick and bar chart, Bollinger Bands is one of the most favorite indicator both for Forex and stock traders. Bollinger Bands is a strong tool among all the other Forex indicators, because it tells you whether the market has the maximum deviation from the average or not. This means Bollinger Bands tells you when the dominant party is exhausted and the market is overbought or oversold. Above all, the breakouts that the price, specially the candlesticks, form with Bollinger Bands, are strong patterns for taking the reversal trade setups or signals.
So, Bollinger Bands is a strong and important Forex indicator.
MACD, specially MACD Bars, are among the most popular indicators for the stock traders. As online Forex trading has been introduced to the public by the stocks traders, MACD is a popular and strong Forex indicator too. It is one of the most popular Forex indicators.
The good thing with MACD is that as it is delayed, it stops the novice traders from over-trading and entering the markets while there is no real and strong trade setup. So if you are a novice Forex trader, I recommend you to have MACD on your chart and confirm your trading strategy trade setups with MACD.
MACD Divergence and Convergence are some strong chart patterns and events that help a lot to confirm the other trade setups like support and resistance breakouts.
5. Stochastic Oscillator
Most retail stock traders love the Stochastic Oscillator indicator. This indicator shows you the price speed and momentum, and so, it is an important indicator to help you understand when and where there is a higher probability for the price to turn around. However, there is a very special way to use this indicator that if you don’t know it, it can cause you to have so many losing positions.
Indeed, Stochastic Oscillator is the important cause of some Forex traders losses, because they don’t know how to use it properly. But it is a great Forex indicator if you know how to use it.
6. Relative Strength Index or RSI
Relative Strength Index or RSI is the last indicator in my Forex indicators list. Of course we use Pivot Levels too, but they are some price support and resistance levels and I don’t want to consider them as indicators.
RSI is a very special indicator that looks very different from the others. It not only forms the patterns like RSI Divergence and Convergence, but also it forms support and resistance lines and levels, and so, support and resistance lines and levels breakouts. The good thing is that sometimes these breakouts form before the support and resistance breakouts on the price chart, which means RSI can sometimes tell you in advance that the support and resistance line or level you have on the chart is about to become broken.
All Important Forex Indicators on One Chart
Now, I am going to show you a trade setup that is formed on GBP/AUD weekly chart. I want to show you how the above indicators confirm a resistance level breakout. However, I remove Bollinger Bands because it doesn’t help in case of this trade setup. Please refer to the below chart.
I have the most popular Forex indicators on the below chart: Candlesticks, Stochastic Oscillator, MACD Bars and RSI
As you can see, there is a resistance level at 1.7203 that is broken by 2017.04.23 weekly candlestick. It means this candlestick has closed above the 1.7203 resistance level.
At the same time, Stochastic Oscillator is in overbought area which is a good confirmation for the validity of this resistance level breakout. This is how you can use the Stochastic Oscillator. You have to use it as the confirmation of the price actions like support or resistance breakouts. To confirm price actions, this Forex indicator is in oversold or overbought area respectively. Using this indicator when it is moving between the 80 and 20 lines is risky.
MACD bars have been going up long time before the 1.7203 resistance level breakout. They broke above the zero level when the next candlestick opened. This is also a big confirmation indicating that bulls have taken the control.
Long time before 2017.04.23 weekly candlestick closed above the 1.7203 resistance level, RSI had broken above the 50 level and also a resistance level it had formed a little below the 50 level.
It means all of these strong and important Forex indicators have confirmed the 1.7203 resistance level breakout that is formed by 2017.04.23 weekly candlestick:
As a Forex trader, you can use all of these indicators the way I explained above. When all of them line up to confirm a price action like support or resistance breakout, it means a good and strong trade setup is formed. But you have to learn how to use these Forex indicators to confirm the price actions. I mean you have to know the best confirmation that forms by these indicators, otherwise you would only think that the price action is confirmed while it was not.
The other important thing is that having all of these strong Forex indicators and using them the best possible way, is one thing, and limiting and managing your risks is another important thing. You should never take more than a 2% risk even when everything looks great on the chart and all your Forex indicators confirm the strength and validity of the trade setup.
The last but not the least, is something that I always emphasize on, because you can’t make money through Forex trading, even when you have mastered to use all the Forex indicators and you know how to locate the best price actions and trade setups. The reason is that mastering the trading strategies don’t work when you don’t have a proper living strategy. Never ignore this important fact: Trading Strategies Don’t Work If You Don’t Choose the Right Living Strategy