Forex Basics - Technical Indicators

 

 

If you haven't already, please take our Forex Basics and Forex Price Action Basics courses.

As taught in the recommended courses above, future price movement can be determined by analysing price charts - recognising trends, price patterns and periods of market indecision are some ways that a Forex trader may analyse historic price and try to predict where future price might be. Another way a Forex trader can analyse price charts is to use technical indicators... 

What are technical indicators?


Technical indicators often look like flashy or squiggly lines that show on a price chart.  They formulate price data in order to help a trader or investor know what price is doing or where future price may be. Below is a price chart of the EURUSD that shows some common technical indicators...

What is the purpose of technical indicators? Why use indicators?

 

The purpose of a technical indicator is to show a Forex trader what price is doing (trending, ranging, etc) or where future price movement or direction might be. They are meant to help a Forex trader analyse price in greater detail and provide a trader with an edge. Using technical indicators can be a quick and simple method to help determine if price is trending, if price is indecisive, if a trend could be coming to an end, if a trend could be starting and if market momentum is shifting. Good traders use a combination of price action and technical indicators in their Forex trading decisions. 

Are there different types of indicators?


There are many types of technical indicators. These include lagging and leading indicators, trend indicators and oscillators. 

Lagging indicators - most technical indicators are lagging indicators. Lagging indicators will show a trader or investor when price is trending or ranging, they will not usually predict a trend or range. A lagging indicator gives a signal after something has happened. 

Leading indicators - leading indicators are meant to signal when something is about to happen. They also use historic price data but try to predict where future price may be. 

You may be thinking, 'I am only going to use leading indicators and make a ton of money!'. Unfortunately, trading with indicators is not that easy. Just like price action patterns and support and resistance, technical indicators are not always reliable. A lagging indicator may signal that price is bearish but by the time it signals the bearish momentum price could now be bullish. A leading indicator tries to predict future price movement but can often give false signals and be wrong. 

Trend indicators - trend indicators can also be called momentum indicators. These technical indicators are meant to show the current trend direction and the strength (momentum) of the current trend. Common trend indicators include simple and exponential moving averages and the MACD. Trend indicators are often lagging indicators. 

Oscillators - these indicators provide a trader with either a buy or sell signal. In other words, they show a trader that price may reverse/change direction. Common oscillator indicators include the relative strength index (RSI), the stochastic and the parabolic SAR. Oscillators are often leading indicators.  

Can you make money trading Forex with indicators?

 

Technical indicators look very impressive but they are not an easy solution to profitable Forex trading. Technical indicators should be used as a way to confirm price action analysis and should be used as part of technical analysis. A well-rounded and profitable technical Forex trader usually focuses on a combination price action, technical indicators and strict money management. 

Learn more about technical indicators and how to use them when trading Forex by continuing with our Forex Technical Indicator Course