When trading in Forex, you will often need a little help to be able to open and close your positions. Due to the high leverages offered by several brokers, both profits and losses can be heavy. With the help of chart indicators, you can maximize your profits and minimize losses.
You will find several types of chart indicators, each adding their own analysis to the market. They have been carefully designed to track market movement, averages, and other technical components of trading.
Read ahead as we take you through what chart indicators are. We then list the 9 popular chart indicators that can benefit your trading activity.
What are Chart Indicators?
Whether you are interested in Forex or any other trading, a few mathematical calculations can inform your trading decisions better. Every forex trader comes with a toolbox that they can then manipulate to get the best of your trade.
With the right Forex trading tools, you will be able to make the right decision at the right time. There are several chart indicators that can help you through this process. They indicate support and resistance levels that measure indicator’s like a market’s movement, volatility, and other statistical figures.
The above factors help in plotting charts and graphs that will help you make a decision on when you can open and close your trade.
Who Uses Chart Indicators?
If you are wondering who uses chart indicators, you will find that they are mostly used by those that take part in short-term trades and use Technical Analysis. These charts are a part of the toolbox of Technical Analysis.
Long-term traders, instead largely depend on timely economic news over the years and instead use Fundamental Analysis. However, chart indicators can be beneficial to both kinds of traders. A combination of the two can often lead to good trading decisions.
How Do Chart Indicators Work?
One of the most popular charts is Bollinger bands. This helps measure the volatility of a market.
With this, you will see an assumption at work. This is the idea that the price will always return to the middle of the Bollinger bands. Traders often use this chart in ranging markets to open and close trades at either band level.
Many traders also use a chart called the Moving Average Convergence Divergence (MACD). This tracks market trends to combine two moving averages to indicate to the trader the best times to buy and sell. Other indicators include the Parabolic Stop and Reversal (SAR) that represents bullish and bearish signals for different trading styles.
You can also use the Stochastic Indicator, Relative Strength Index (RSI), Average Directional Index (ADX), Ichimoku Kinko Hyo (IKH), among others. Most traders combine a few of these indicators to pick the best strategies and time for them to trade. We have discussed each of these in detail below.
Classifying Chart Indicators
You will also find that while some indicators are leading, others will be lagging. A leading indicator is a great option for those traders who watch the charts closely before they make a move. These indicators give the trader a signal just before a new trend or a reversal of the trend occurs.
They essentially predict and forecast a trend. A lagging indicator, on the other hand, will tell you the status of the market after a trend has begun. Hence, instead of predicting, it simply informs the trader about market conditions.
An informed trader tends to keep both handy so that a combination of the two can help him make the best trade. In ranging markets, you will find that leading indicators work much better than lagging indicators.
Read ahead as we explain the 9 most popular chart indicators for you. We have also explained just how you can go ahead and use them.
9 Most Popular Chart Indicators Explained
We have listed the 9 most popular indicators used by traders of different kinds. By understanding each, you will be able to pick one or more that suits your trading style best.
- Bollinger Bands and How to Use Them
Bollinger Bands are one of the most popular technical indicators used in Forex trading. They were developed by John Bollinger and are used to indicate a market’s volatility. With this, you can go ahead and identify any overbought and oversold positions.
With this tool, you will be able to tell whether the market is calm and quiet or if it is buzzing with action. Bollinger Bands are displayed over the price on a chart. Hence, they are an overlay chart indicator.
When the chart is quiet, and the activity in the market is limited, Bollinger Bands remain close together. When the market is volatile, you will notice that they will spread apart on the chart. Over time, the prices tend to vary.
There is an upper and a lower band in a Bollinger Band pair. Together, both track these varying prices to track their degree over time. In other words, they track the degree by which price varies over time.
You may want to note that these bands automatically adjust to any activity in the market and reflect market conditions at any given point in time.
What is a Bollinger Bands Chart Made Up?
As discussed, Bollinger Bands have an upper and a lower band. They also have a middle line, which is an indicator called the Simple Moving Average (SMA). The Moving Average in most charts is calculated for a 20-day period.
The upper band is two standard deviations above the middle line. The lower band, on the other hand, is two standard deviations below the middle line. This simply means that 95% of the price changes that have occurred in the recent past have been contained within the Bollinger Bands.
How Can You Use the Bollinger Bands?
The Bollinger bands act like changing support and resistance bands on a chart. As the price touches these, it is projected that they will reverse back to the center. If the market is ranging, and there is no clear trend that defines it, these bands can prove very useful.
If the Bollinger Bands are stable or contracting, this means that you can go short or buy long when the prices touch the Bands. This is called the Bollinger Bounce strategy.
If the Bollinger Bands are expanding, this means that the market is trending and moving away from its current pattern. At this point, the Bollinger Bounce is not the best strategy to use.
There is also something called the Bollinger Squeeze. This happens when the bands squeeze together, and a breakout is then anticipated. At this point, pay attention to the candles on the chart. If they break out above the upper band, the market will likely trend upwards.
If they break out below the lower band, you will find that the market will likely continue to trend downward. These circumstances may occur about once a week, but they can result in good profits when they do.
- Keltner Channels and How to Use Them
In 1960, Chester Keltner wrote a book called How to Make Money in Commodities. He was a grain trader who introduced a new volatility indicator called the Keltner Channels in this book.
In 1980, Linda Rachke created a revised version of the same indicator. This is the most popular version of the Keltner Channels indicator used today. It is similar to the way in which Bollinger Bands has been structured.
This is because both indicators work using three bands. They help identify the overbought and oversold levels on the chart. These are placed relative to a Moving Average. Do note that the Keltner Channels automatically adjusts to a volatile market and represents this.
What is a Keltner Channels Chart Made Up of?
Keltner Channels is made of three lines. The upper and lower lines act like resistance and support lines in a moving market. These two lines represent the Average True Range (ATR). The ATR is itself a volatility indicator. As a result, this chart will not be as volatile as the Bollinger Bands are.
The third and middle line represents an Exponential Moving Average (EMA). Most charts that display the Keltner Channels use 2 x ATR (10) formulae to plot the upper and lower lines, and EMA is calculated for 20 periods.
When there is an uptrend, you will find that the price moves in the upper part of the chart. It will mostly move between the upper line and the EMA line. When there is a downtrend, prices will largely move between the lower and the EMA line.
If the market is ranging, you will find that the price will touch both lines and switch.
How Can You Use the Keltner Channels?
You will have to look for candles in the chart that break out to be able to trade using Keltner channels. If you notice that the candles break above the top line, the market is likely to continue trending upwards.
If it breaks out below the bottom line, the market is likely to continue trending downwards. By paying attention to these breakouts, you can either go short or buy long, depending on your strategy.
- MACD Indicator and How to Use It
We have mentioned the MACD indicator above, and you now know that it stands for Moving Average Convergence Divergence indicator. These charts represent any new trends and will be able to indicate whether the movement is bearish or bullish.
If you are a bull trader, you will lookout for a market that is trending upwards. Bear traders look to profit from markets that are trending downwards. Trending markets hold the most potential for making profits, and this is precisely what the MACD indicator hopes to display.
Since it is a lagging indicator, it will mostly give you precise knowledge about the market. However, it also has a few leading elements and can make you make some important decisions.
What is a MACD Indicator Chart Made Up of?
With a MACD chart, there will be three numbers that form its part. The first is a line that represents the faster-moving average that is usually calculated for 12 bars or periods. The second is a line that represents a slower moving average that is calculated at default for the previous 26 periods.
It also includes the calculated moving average of the difference between the faster and slower moving averages. This number is 9 at default in most charts. A histogram is used to represent this for the chart.
Do note that the 2 MACD lines are not the moving averages but the difference between the moving averages from various periods. As both moving averages move apart from each other, you will find that the histogram becomes bigger. This is because it represents the difference between the slow and the fast-moving average lines.
How Can You Use the MACD Indicator?
When the faster moving average line moves closer to the slower moving average line, this indicates a MACD convergence. When it moves away, it indicates a MACD divergence. You will know that a new trend has formed when the faster line crosses over and diverges from the slower line.
If the fast line crosses under the slow line, this indicates a downtrend in the market. At the point of crossover, both moving averages are the same, and the histogram disappears. As there is a MACD divergence and the fast line moves apart, the histogram gets bigger.
It is likely that the market will continue downward after this crossover. Hence, it is a good time to sell short here. If the fast line crosses over the slow line, this indicates an uptrend. Buying long can yield profits in this case.
- Parabolic SAR and How to Use It?
The charts discussed above largely indicate the beginning of trends. The Parabolic Stop And Reversal (SAR) is a chart indicator that instead displays just where a new trend may end. With the Parabolic SAR, you will find points on the chart where the current trend may potentially reverse.
The candles indicate when you should go ahead and place your trades. It is a momentum indicator that is very simple to use. It was introduced by J. Welles Wilder Jr. in his book called New Concepts in Technical Trading Systems.
What is a Parabolic SAR Chart Made Up of?
You will find that the Parabolic SAR won’t use a scale from 1 to 100 to indicate trading levels. Instead, it displays a series of dots that are placed strategically above and below the price. This refers to the candles in the chart.
If you see that the dot switches its current position, this is an indication that the current trend will most likely come to an end. At this point in time, it is a good idea to close any open positions you may have that are banking on the current trend.
It also has a trailing Stop level that resembles a parabolic curve. This indicator assumes that you are banking on a trend and hence works to indicate any potential reversal to you.
How Can You Use the Parabolic SAR?
The Parabolic SAR is rather simple to use. If you find that the dots are below the candles on the chart, it is the best time to go ahead and buy. If you see the dots below the candles, you can go ahead and sell short.
However, do note that this trend works really well in markets that are trending and may not work as well in stable markets. If the market is moving sideways and in choppy ways, this is not the best place to use this chart indicator.
With the above, you can use the chart to enter a trade. To exit a trade, for instance, you may have shorted a pair when the market was trending downwards. When should you close the trade? You will require the price to go as low as possible. Hence, wait for when the dots shift on the charts,
This indicates a reversal in the trend and is a good time to exit the trade.
- The Stochastic Indicator and How to Use It
The Stochastic Indicator is an oscillator that will guide you to the place where a trade ends. It was created in the late 1950s by George Lane.
This indicator works around a simple assumption. This suggests that the prices will remain above or equal to the previous closing price during an uptrend. On the other hand, they remain equal to or below the previous closing price during a downtrend.
By using the degree by which prices changed during the previous closing period, they predict the direction in which the trend will most likely continue. There are two lines in a Stochastic Indicator. One is faster than the other.
What is the Stochastic Indicator Chart Made of?
In a Stochastic Indicator, there is a defined range between 0 to 100. There are two lines on the graph. The first one oscillates fast, is called %K. The second is a moving average of %K and is called %D.
When the price closes in the upper half of the range, the Stochastic Oscillator will be above 50. It will be below 50 if the price is in the lower half of the range. If the reading is below 20, this is a low reading that indicates that a price is near its low for the time period.
If the reading is above 80, this is a high reading that indicates that the price is near its high for the given period.
How Can You Use the Stochastic Indicator?
One of the best ways to trade Stochastic is by paying attention to the overbought and oversold levels. 80 and 20 on the chart are the most common levels that are used. The area above 80 displays an overbought level, and below 20 displays an oversold level.
When the oscillator is above 80 and crosses back, this is considered the sell signal. When the oscillator moves below 20 and then crosses back above it, this is considered the buy signal.
When the %K and %D lines crossover in the overbought and oversold areas, this serves as a specific signal. If the %K line crosses below the %D line in the overbought region, this indicates a sell signal.
When the %K and %D line crossover in the oversold region, this indicates a buy signal. Note that the %K line has to cross above the %D line here.
You will also find that the indicator accounts for divergence. Moreover, this occurs when the prices reach new highs or lows, but the Stochastic Oscillator does not follow suit. If the price makes a lower low and the Stochastic Indicator makes a higher low, this indicates less downward movement. It may lead to a bullish divergence and reversal.
If the price reaches a higher high, but the Stochastic Oscillator makes a lower high, this indicates lesser upward momentum. This may lead to a bearish divergence and reversal. Stochastic Oscillators have fast, slow and full versions.
The charts you use will have one of these versions working for you.
- Relative Strength Index (RSI) and How to Use It?
J. Welles Wilder, a technical analyst, developed a technical indicator that can measure the strength of the current market. This is called the Relative Strength Index (RSI), and it is used to define the overbought and oversold positions in the market.
It appeared in his book called New Concepts in Technical Trading Systems. It has a scale of 0 to 100 displayed on the chart. This indicator measures the strength of a currency pair by comparing and contrasting its recent upward movements and downward movements.
What is the RSI Indicator Chart Made Up of?
The RSI Indicator is just a single line that is calculated by combining certain information and calculations in the market. These include the average gain in a set period of time when the market advances. It also includes the average loss within a set period of time when the market declines.
A ratio of the values derived from this information is used to create a new value that moves between 0 to 100. If the reading on the chart is above 50, this largely indicates that the price movement is rising. If the reading is below 50, this indicates that the price movement is falling.
If the RSI is below 30, this indicates an oversold position. If it is above 70, this is an overbought position. The 30 to 70 area on the chart is a neutral area. As a default, the RSI is set for 14 periods. However, depending on the kind of trader you are, you can use different values for the period.
For instance, about two periods work well for a weekly chart, and traders may even go as high as to choose 25 periods.
How Can You Use the RSI Indicator?
Look for overbought signals above 70 and oversold signals below 30. When the RSI crosses these positions, this generally indicates the end of a trend and that the price may soon move in the opposite direction.
Hence, an overbought currency pair may indicate a good time for the trader to sell. An oversold pair may indicate a good time to buy. Do note that during an uptrend, the RSI should be moving above 50. During a downtrend, it should be moving below 50.
The strength and weakness of the trend can also be calculated using the RSI indicator. This is done through the Convergence and Divergence in RSI. When the RSI moves in the same direction as the price does, this suggests that the trend is strengthening. It indicates an increasing bullish momentum.
On the other hand, if RSI moves in the opposite direction as price, this suggests that the trend is weakening and is an indicator of a decreasing bullish momentum.
- Williams %R and How to Use It
The Williams %R is also called the Williams Percent Range. This is a momentum indicator that takes account of the highest and lowest closing prices of a certain period. This is then compared to the position of the last closing price.
Williams %R will largely tell you whether a currency pair will be oversold or overbought. It works similarly to the Stochastic Indicator, but traders find that it is much more sensitive. It is also not as popular as the Stochastic indicator.
Similar to RSI, it also measures the strength of a current trend. It oscillates between the -20 and -80 levels.
What is the Williams %R Indicator Chart Made Up of?
The Stochastic Indicator and the Williams %R are so similar that they use the same formulae to point out the location of a currency pair. With the Stochastic, you will find that the relative closing price is calculated with reference to the lowest price during a time period.
Instead, with the Williams %R, you will see that the same formula is used by replacing the lowest price with the highest price during the given time period. An inverted %R line from the Williams %R is the same as the %K line on the Stochastic Indicator.
This is the same reason that the Williams Percent R ranges between 0 to -100, unlike the Stochastic, which ranges between 0 to 100. An overbought signal here will suggest that the price is nearing the highs of its latest range.
With an oversold signal, you will find that the price is near the lows of its recent range.
How Can You Use the Williams %R Indicator?
The Williams %R indicator is sensitive to volatile prices, and this can be used to measure the strength of a movement. The charts will indicate whether the price is maintaining a bullish or bearish momentum.
If the current price is closer to -100, this means that it is close to the lowest low in the recent past. If the current price is instead close to 0, this means that it is close to the highest high in the recent past.
A reading above -20 indicates an overbought level. This also indicates that the price is moving near the top part of the high-low range. A reading below -80 indicates an oversold level. It also indicates that the price is moving near the bottom of the high-low range. These are the default settings in most charts.
The Williams %R can also be used to gain an idea of the price momentum. When the price begins to rise, and the indicator moves back above -80, this signals a resuming uptrend. You will have to wait for this to occur after the Williams %R first moves below -80.
If the market is trending downwards, you will have to wait and see when the Williams %R moves above -20. You may now notice that the price begins to fall, and the Williams %R moves below -20 again, indicating that the downtrend is resuming.
By paying attention to this momentum, you will be able to place your trade.
- Average Directional Index (ADX) and How to Use It
When you need to ascertain the strength of a trend, the Average Directional Index (ADX) is a popular chart indicator that you can use. Often, regardless of the direction of the trend, its strength will matter to the trade you make.
The ADX is an oscillator that fluctuates between 0 to 100 levels. To indicate a weak trend, the ADX has to be below 20, and a reading above 50 will indicate a stronger trend. These happen to be the default settings in most charts.
The higher the ADX, the stronger trend indicates. If the ADX is low, this may indicate that the price is moving sideways in a range. If the ADX moves above 50, this indicates that the price has picked up momentum in one direction.
Do note that the ADX will not indicate whether a trend is bullish or bearish. Instead, it will only tell you the strength of the trend.
What is the ADX Chart Made Up of?
The ADX indicator is a single line that ranges between 0 to 100. It is related to the Directional Movement Index or the DMI. The DMI index features the ADX index in it. With ADX, you will be able to tell whether a trend is trending or ranging.
For a trending market, the value will be above 25. Below 20, you will find that there is little to no trend visible. If the value moves to 0, you will see that there is no overall market trend. The price may move in any direction.
If the value is 100, this indicates an extremely strong trend in either the positive or negative direction.
How Can You Use the ADX Indicator?
Here are the specifications that will help you navigate the ADX Indicator and its various signals.
If the ADX value is rising, this indicates a strengthening trend. If it is falling, you will find it indicating a weakening trend. If it is below 20, it establishes a weak trend. If it moves above 40, it indicates an extreme trend. The values between 20 and 40 indicate a strong trend.
Do note that the ADX won’t be able to tell you where to buy or sell. It will only tell you whether you should take advantage of a trend. ADX is largely assessed together with breakouts or other indicators to tell you whether you should go short or buy long.
- Ichimoku Kinko Hyo and How to Use It
The Ichimoku Kinko Hyo is an indicator that will help predict future price momentum and the support and resistance levels that will become prominent in the future. As the name suggests, the indicator is largely used in pairs where the JPY is present.
When translated, Ichimoku stands for a glance, and Kinko stands for equilibrium. Hyo then is a Japanese word that translates to a chart. The indicator was used for trading rice for the longest time. The indicator also works well in both rising and falling markets.
This is not the best indicator to use when the market is choppy and trending sideways. When the price is trending on the sides of the cloud, this is when the Ichimoku Kinko Hyo works best.
What is the Ichimoku Kinko Hyo Made Up of?
There are a few lines that make up the Ichimoku Kinko Hyo chart. The first is the Kijun Sen or the blue line. This represents an average of the highest high and the lowest low calculated for the past 26 periods.
You will then find the Tenkan Sen line or the red line. This calculates the highest high and the lowest low for the last 9 periods and is also called the turning line.
There is the Chikou Span or the green line. This is a lagging line that is the current closing price that has been plotted before 26 periods from the present day.
You will finally find the Senkou Span or the orange lines. These are two lines that are calculated by averaging the Kijun Sen and Tenkan Sen lines and are plotted 26 periods forward from the present day.
How Can You Use the Ichimoku Kinko Hyo Indicator?
You can use each of the lines above relative to price, and the interpretation of the chart changes when each is brought into focus. For the Senkou line, note if the price is above it or below it.
If it is above, the first support level will be the top line, and the second support level will be the bottom line. If the price is below, the bottom line will be the first resistance level, and the top line will be the second resistance level.
With the Kinju Sen, you will be able to gauge future price movement. If you see that the price is higher than the blue line, it will continue to climb higher. If it is below the blue line, it will keep dropping.
With the Tenkan Sen line, you will be able to gauge the market trend. If you see that the red line is horizontal, this indicates a ranging market. In a trending market, you will see that this line moves up and down.
Finally, the Chikou Span tends to give buy and sell signals. If it crosses price in the bottom-up direction, it is time to buy. If it crosses the price in a top-down way, this is a sell signal. With this indicator, you have support and resistance levels, oscillators, and trend indicators in a single chart.
Trading with Multiple Chart Indicators
Every indicator that we have listed above has a few things that it does not take into consideration. For this reason, many traders use a combination of indicators together so that they can get the best of each.
A combination can yield much better trading results than just a single one can. For instance, a trader might use three indicators and will not make a move unless all of these are compatible and give the same signal.
For instance, Bollinger Bands and the Stochastic Indicator are often used together. Note a scenario where there is an upward trend, and you are looking for a price reversal to trade on.
A combination of these two can guide you to a signal where both indicate that you can make the trade. For instance, the price of a currency pair may rise to the top of the band that acts as a resistance level.
At the same time, the Stochastic may move to the overbought part of the chart. Both charts now indicate that the price will drop down soon. This timely confirmation from both indicators will now give the trader the confidence to make his move.
It is a good time for traders to go short here. Similarly, the RSI and MACD can also be screened together to spot any potential trends. Look for similar signals on both charts. For instance, the RSI may reach the overbought area, and the MACD may follow a downward crossover.
Both indicate a sell signal, and you will see that the price will move downwards. There is a combination of each trader and trading style.
What is the Best Technical Indicator in Forex?
The Ichimoku Kinko Hyo indicator may be of the best technical indicators as it combines many predictions and functions into a single chart. Hence, you will know both the strength of the trend, support and resistance levels, and other factors in a single indicator.
While other technical indicators are great at what they do, they often work best in combination with other indicators.
Endnotes
You have now seen the 9 most popular chart indicators and how you can use them to benefit your trade. While some indicators simply indicate the strength of a trend, others will guide you to the best opening and closing trades you can make.
It is best to combine a few indicators to narrow down the best option for you. Each trader is different, and you will only find your ideal combination of chart indicators when you go ahead and practice.