Trend indicators are a popular tool for market analysis. They are used in trading strategies independently, combined with each other, or together with oscillators. Let's consider a trend indicator, how to use it, and what features should be regarded when included in a trading strategy.

What are indicators for trading?

A trading indicator is a mathematical tool automatically calculated based on current price values ​​and gives a specific signal. Most of them are a little late, but with a brilliant combination, they provide good entry points - tips on when it is better to buy stocks, sell currencies, and take profits.

It is worth noting that there is no perfect indicator. The best indicators for trading are those that a particular trader understands well and can create a profitable trading strategy based on them.

Coming to the market and starting trading, the leading indicators are the simplest. Combining within one strategy at most four hands is recommended to keep the chart manageable and make it easier to determine the entry point to the deal.

Types of technical trading indicators

What are the technical indicators of trading strategies? They are divided into several types: trend, oscillators, volume indicators, authors, and Bill Williams indicators. Most are built into trading platforms like MetaTrader 5 for Mac m1.

Trend indicators move after the price. They are used to find trade entry points in the direction of the current trend in the market. A buy trade is opened in an uptrend, and short positions are appropriate in a downtrend.

Oscillators are reversal indicators displayed in a separate window below the chart and show an asset's overbought and oversold zones. When the price comes out of overbought, a sell position is opened, and when it comes out of oversold, you can go for a buy.

Volume indicators are different. The author's developments show at what price the most buy or sell positions are located. The data for them is automatically read from the volumes on the Chicago Stock Exchange. Simple Volumes in MetaTrader 4 shows forex tick volumes and could be more informative.

The author's indicators are created by the developer for a specific task. They can show the spread dynamics between correlated assets and price reversal levels, automatically draw technical analysis figures on the chart, etc. A good indicator helps automate market analysis and make Forex trading more profitable.

The best indicators for trading

Consider the most popular and simplest indicators for trading. They can be combined with each other as part of a trading strategy.

Moving average

This is a trend indicator, a moving average. The range of its application is wide. It gives different signals depending on the period for which the average price value is formed.

So, for example, the intersection of “light” moving with a short period (for example, 15 and 25) is used for intraday trading with the trend. A "heavy" moving with a period of 200 is used as a floating trend line on the daily chart.

Bollinger Bands

Another trend indicator is based on the moving average. It consists of three lines forming a channel. Bollinger is used for intraday strategies and for scalping. In this case, its settings will be different and separately indicated in the description of each tactic.

This indicator is used for a rebound inside the channel and a breakout. Often combined with additional Moving Averages. There is no universal rule of application; it is worth focusing on the conditions described in each specific strategy.

Relative Strength Index

RSI is the Relative Strength Index, an oscillator that is often used in combination with Bollinger Bands. It is set in a new window below the chart. Its signals are formed based on the price exiting the overbought zone (above level 70) and oversold (below level 30).

MACD

Another indicator is an oscillator. Like RSI, it is displayed under the chart in a separate window. Consists of a histogram and a signal line. By analyzing it along with the chart, traders are looking for divergence and convergence signals that show in which direction to open a trade.

Stochastic

A popular oscillator that gives signals about a market reversal. It also reads convergence and divergence and exits from the overbought and oversold zones.

Which of these indicators is better to use? It depends on the chosen trading strategy. The most popular combination of one or two trends and one oscillator forms a trading signal.

Advantages and disadvantages of trend indicators

Newcomers to trading often need help finding the most accurate trend indicator. But there is no such thing. All mathematical analysis tools have advantages and disadvantages. One can only learn how to correctly apply them with Forex training.

Why can't indicators be considered a panacea when trading on the foreign exchange market? First, the price is always primary; the trend indicator follows it and gives a lagging signal. Also, the market may begin a reversal before the trader realizes the trend has stopped. In this case, the indicator signals will turn out to be false.

The main disadvantages of trend tools:
  • Moving averages, Bollinger Bands, and other price-following indicators work only in a trend. However, the market spends 80% of the time in a flat, which means that the signals will be uninformative;
  • The signal delay gives a non-optimal entry point to the trade, which worsens the risk-reward ratio;
  • News often leads to a sharp surge in the market price, which leads to a distortion of the signal.
You can avoid the influence of these features by combining trend indicators with oscillators and tracking important economic events using Forex news sites.

Conclusion

Trend indicators are the basis of many strategies in the foreign exchange market. Their competent combination and selection of settings allow the trader to find profitable entry points into transactions. It is also recommended to track the times the indicators work best using a forex trading chart.