How to Recognize the Best Forex Indicators

The forex market is big. Even bigger than some of you might assume. In 2020, the forex market grew to a staggering $2.4 quadrillion. This is a significant increase compared to 2016 when it was valued at around $1.9 trillion. If you’re looking for a stable market to get into, forex might be a good option for you. But where to start? 

You need to start by learning the basics of technical analysis. And there’s no better place to start than technical indicators. Indicators aren’t there only to make forex charts look more visually appealing. They have a specific purpose and today, we’re going to talk about it and try to explain how to recognize the best forex indicators. 

What Are Forex Indicators in the First Place?

First things first, we need to explain what forex indicators are. In short, they’re mathematic calculations based on interest, exchange rates, or volumes of certain currency pairs. All of the major indicators are based on exchange rates. Using forex indicators, traders can get a better overview of the market, which in turn, will help them make more informed decisions. 

In short, using forex indicators, traders can successfully eliminate a lot of guesswork from their trading efforts. 

If you’re new to all of this, you need to as much research as you can about the best free forex indicators and find a reputable broker to help guide you. A good broker will teach you about different trading techniques, analysis, and how to read charts. No matter what business you’re in, having first-hand experience is everything. 

No matter how much knowledge you accumulate, it means nothing if you can’t use it in a practical way. Now, let’s proceed to...

Lagging Indicators vs. Leading Indicators

Good indicators give you clearly readable market signals and relevant data. But how can you know what indicator is good for you? What makes a good forex indicator? There’s no single answer to these questions because a good indicator offers many different things and can be applied to many different trading strategies. 

All technical indicators fall into one of two categories, lagging and leading. The latter shows traders when forex prices rise and the first one shows the background conditions with moving prices. You also have lagging and leading volume indicators, but that’s a topic for another day. Let’s talk about different categories of lagging and leading indicators.

There are two lagging indicator categories:

1. Trend indicators, which show whether the market is moving up, down, or sideways
2. Mean revisions, which show how the price range is sifting under different circumstances

And there are two categories of leading indicators as well:

1. Momentum indicators, which help you measure the price speed
2. Relative strength indicators, which can be used to evaluate oscillators in different scenarios  

With all of that out of the way, we can finally discuss...

The Best Forex Indicators for All Traders

In order to help you avoid ineffective market signals, you as a trader need to carefully pick the indicators you’re going to use. The best way to do this is to familiarize yourself with the best forex indicators, set up a few ones, and see how their output helps you with the market analysis. 

Here are some of the most widely-used forex indicators out there… 

• Moving Average

The Moving Average is the indicator traders use the most. It can be used to identify market trends and to monitor them closely. It allows you to do this by following the price of a currency pair of your choice, for a certain amount of time. The Moving Average cancels all of the noise surrounding the price, which in turn, helps you predict the price. 

Moving Average Pros

• Helps you recognize trends in the forex market
• Gives you a complete reversal of market trends
• Provides an overview of support and resistance levels

Moving Average Cons

• It’s not exactly perfect for real-time traders because it may lag
• Mainly used by beginners who hesitate to make trading decisions

• MACD

In order to become familiar with the current market phase, the Moving Average Convergence/Divergence is the perfect tool. It gives traders signals when the forex market is calming down and when it's going in another direction., 

MACD Pros

• It works perfectly if you want to have a read of the market in different situations
• Doesn’t require too much experience to read the oscillators with MACD

MACD Cons

• Just as the Moving Average it can lag behind the price
• You may not be able to read trading signals on time using MACD

• RSI

The Relative Strength Index, just like the previous indicator we discussed is an oscillator. However, the RSI movement occurs between 0 and 100. Most traders use this indicator when the forex price is seemingly overbought, which happens when the histogram goes over the 70 mark. If the mark is at 30, it’s a downtrend scenario. 

RSI Pros

• Provides more consistency than other oscillating indicators
• A vast majority of trend traders use RSI to navigate their strategies 

RSI Cons

• Falls into the category of lagging indicators
• Won’t do you any good if you’re looking for reliable timely market signals

• OBV 

On-balance Volume can be extremely useful. You can use it to collect market volume data and create a single line chart. It will show you how the collective market pressure combines on the volume on uptrend days and drops on the downtrend ones. 

OBV Pros

• If you’re looking for trend confirmation, OBV can be a great tool
• Traders looking to predict price fluctuations often use RSI

OBV Cons

• Even though it will give a reversal prediction, false signals will be present
• A huge volume rise can affect the indicator accuracy for a couple of months

What to Keep in Mind About Forex Indicators 

That’s what you need to know about the best forex indicators and how to recognize them. If you’re a beginner, this should give a good foundation for learning about the forex market. Lastly, we want to draw your attention to two things every trader needs to know about forex indicators:

• There are no perfect forex indicators, all of them come with pros and cons
• In order to get the best results, a trader should use multiple indicators 

You can learn all of the fundamental trading strategies, however, that won’t do you any good without the right indicators. If you’re just starting, talk to more experienced brokers about the best forex indicators for their strategies, learn as much as possible, and use that knowledge wisely.