Here we will look at the best Forex trading indicators, the list is subjective and of course no Forex indicator works all of the time but these indicators can all add extra profit potential to your currency trading strategy. So lets look at some essential currency trading indicators in more detail.

All these indicators can be plotted on all major chart services and you simply look at the set up and can see at a glance what the indicator is showing in terms of market movement. We will briefly introduce the indicators here and you will find specific articles on each indicator which explains them in more detail on this site.

Bollinger Bands

A popular indicator developed by John Bollinger, Bollinger Bands are essentially volatility bands that are placed above and below a simple moving average which is normally 20 days in duration, although the setting can be changed. So you have one moving average in the centre and one band above and below it which show you the volatility of price.

The moving average represents the average price over the specific period of the length of the average which smooths the average price. Volatility of the outer bands automatically adapts to price changes and the bands widen when volatility increases and narrow when volatility decreases.

If you want to trade successfully, you need to understand and see standard deviation of price and Bollinger Bands allow you to do just that.

The Stochastic

The Forex trading stochastic indicator was developed by George Lane in the 1950s and today, is one of the most popular of all momentum indicators. The stochastic follows the momentum of the market followed and is based on a very simple concept - During an up-trend, the closing price tends to be near the high, while during down trends prices close near the low.

This indicator has two lines:

• %K compares the current Forex trading closing price to the previous trading range.

• %D is a smoothing of %K that is seen as a signal line.

When the stochastic line is above 80%, an overbought scenario presents itself and when it falls below 20%, the oversold scenario presents itself. The basic way to use the stochastic is to do the following:

Look top buy when the indicator falls below the line, and when it crosses the bottom level up.

Look to sell when the indicator rises above the line, and crosses the top level downwards.

Buy when the %K line crosses the %D line from below upwards, or from top downwards this is referred to as bullish or bearish divergence and can be used to time a trading signal.

The stochastic indicator currency's closing price to its price range over a given time period and both the slow and fast stochastic are popular with traders

Relative Strength Index (RSI)

The Relative strength index or RSI is one of the most popular indicators used by Forex traders and was designed by Welles Wilder and introduced to traders in his classic seventies book “New Concepts in technical trading along with the ADX indicator which we will look at next.

The RSI indicator is a momentum oscillator that measures the speed and change of price movements. RSI moves between 0 and 100. Traditionally, and according to Wilder, the RSI becomes overbought when above 70 and oversold when below 30, although many Forex traders use the levels of 80 and 20. The RSI can measure the strength of the trend and when RSI diverges from price a trading signal can be taken counter to the trend.

Average Directional Movement (ADX)

This is another popular Wilder indicator which aims to determine the strength of a trend.

The ADX is an oscillator that moves between 0 and 100 but readings above 60 are very rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but aims to determine the strength of the current trend.

A reading above 40 can indicate a strong down trend as well as a strong up trend and one of the most accurate signals it can give is when a turn down above 40 happens, which can be used to take profits in the trend and look for a contrary trading opportunity.

ADX can also be used to identify potential changes in a currency pair from trending to non-trending. When ADX begins to strengthen from below 20 and moves above it you have a sign that consolidation is ending and a trend is developing.

Simple Moving Averages

The concept of moving averages is simple they are used to:

Smooth the price data to form a trend, they do not predict price direction, but rather define the current direction with a lag. Moving averages are based on past prices, which means they will lag behind current prices and should not be used to enter trading signals.

A simple moving average is formed by determining the average price of a currency pair over a specific period of time and are normally based on the closing price. An 18 day simple moving average is the 18 day sum of closing prices divided by – you guessed it 18.

moving averages are used to determine areas of value over the time period and three popular ones are the 9,18 and 40 day Ma's. In a strong trend, you can very often buy or sell back to these averages. The 9 day is popular with swing trades and the 18 day with trend followers to buy or sell back to in strong trends and finally, the 40 day moving average is used as a stop level and seen as the last defence of the bulls in an up trend and bears in a down trend.

Moving Average Convergence Divergence (MACD)

Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence (MACD) is a popular effective momentum indicator.

MACD turns two trend-following indicators into moving averages into a momentum oscillator by subtracting the longer term moving average from the shorter term moving average. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centre line crossovers and divergences to generate trading signals.

Best Forex Indicators for Bigger Profits

So there you have a brief introduction to our best currency trading indicators and if you learn them and combine them together, you have some essential trading tools which you can seek bigger profits with – we hope you enjoyed reading about these essential trading indicators and you can explore them in more detail in other articles on this site.