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What Are Forex Indicators?

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Want to jump straight to the answer? The best forex broker for most people is definitely FOREX.com

Technical analysis, a popular tool among forex traders, is based on an assumption that all relevant information about a trading instrument is reflected in the market price. All you need to do is analyze historical market data like price or volume and spot patterns that could repeat in the future. Over time, technical analysts have developed many indicators to help them solve this problem.

Best For
Forex Execution
Overall Rating
Get started securely through IG Group’s website
Best For
Forex Execution
N/A
1 Minute Review

IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.  

Best For
  • New forex traders who are still learning the ropes
  • Traders who prefer a simple, clean interface
  • Forex traders who trade primarily on a tablet
Pros
  • Easy-to-navigate platform is easy for beginners to master
  • Mobile and tablet platforms offer full functionality of the desktop version
  • Margin rates are easy to understand and affordable
  • Access to over 80 currency pairs
Cons
  • U.S. traders can currently only trade forex
  • Customer service options are lacking
  • No 2-factor authentication on mobile
Account Minimum
$100
Pairs Offered
80+
Get started securely through FOREX.com’s website
Account Minimum
$100
Pairs Offered
80+
1 Minute Review

FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.

Best For
  • MetaTrader 4 users
  • Beginner forex traders
  • Active forex traders
Pros
  • Impressive, easy-to-navigate platform
  • Wide range of education and research tools
  • Access to over 80 currencies to buy and sell
  • Leverage available up to 50:1
Cons
  • Cannot buy and sell other securities (like stocks and bonds)
Account Minimum
$50 USD
Pairs Offered
47
Get started securely through eToro’s website
Account Minimum
$50 USD
Pairs Offered
47
1 Minute Review

Though Australian and British traders might know eToro for its easy stock and mobile trading, the broker is now expanding into the United States with cryptocurrency trading. U.S. traders can begin buying and selling both major cryptocurrencies (like Bitcoin and Ethereum) as well as smaller names (like Tron Coin and Stellar Lumens).

eToro offers traders the opportunity to invest their assets into premade portfolios or cryptocurrencies, similar to services offered by robo-advisors through traditional brokers. Though eToro isn’t a one-stop-shop for everything an investor needs, its easy-to-use platform and low spreads is a great way to enter the cryptocurrency market.

Best For
  • International Forex/CFD Traders
  • New cryptocurrency traders looking for an easy-to-use platform
  • Traders who want to buy and sell cryptocurrencies on-the-go
Pros
  • Simple platform that is easy to master
  • CopyTrader feature that allows new traders to copy the same strategies used by professionals
  • Virtual dummy account that gives you $100,000 to practice trades
Cons
  • U.S. traders currently limited to cryptocurrencies
  • Only 15 major coins available to trade
Account Minimum
$100 USD (or equivalent)
Pairs Offered
69
Get started securely through HYCM’s website
Account Minimum
$100 USD (or equivalent)
Pairs Offered
69
1 Minute Review

HYCM is 1 of the world’s leading forex brokers, offering investors access to over 69 unique currency pairs. However, forex isn’t the only thing the broker offers — HYCM also offers high rates of leverage, stock and ETF trading, commodity investing and much more. Getting started with HYCM is quick and easy, and most investors can open an account in as little as 10 minutes.

HYCM offers a varying fee structure, which allows investors to choose the spread option that’s best for them. A wide range of educational and investing tools are available, which can be equally beneficial to both experienced and novice traders. Though HYCM isn’t currently available in the United States, it can be a great choice for residents of the other 140 countries where it offers service. 

Best For
  • Investors who want a customizable fee schedule
  • Traders comfortable using the MetaTrader platform
  • Islamic traders who need swap-free accounts that don’t build interest
Pros
  • Wide range of currency pairs available
  • Excellent selection of educational tools
  • $0 deposit and withdrawal fees
Cons
  • Not currently available to traders based in the U.S.
Account Minimum
100 EURO
Pairs Offered
50+
Get started securely through AvaTrade’s website
Account Minimum
100 EURO
Pairs Offered
50+
1 Minute Review

A fully regulated broker with a presence in Europe, South Africa, the Middle East, British Virgin Islands, Australia and Japan, Avatrade deals with mainly forex and CFDs on stocks, commodities, indexes, forex, cryptocurrencies, etc. This brokerage is headquartered in Dublin, Ireland and began offering its services in 2006. It offers multiple trading platforms and earns mainly through spreads.

Best For
  • Beginners
  • Advanced traders
  • Traders looking for a well-diversified portfolio
Pros
  • Controlled by regulatory agencies of multiple countries
  • Choice offered in terms of trading platforms
  • Support available in 14 languages and trading platforms in 20 languages
  • Practice/demo account available for trying out
  • Breadth of trading assets
Cons
  • Does not accept customers from the U.S. as it isn’t regulated in the U.S.
  • Transferring funds to the account may take up to five days; withdrawals could take up to 10 days

The math behind an indicator doesn’t have to be very complicated. It can be a simple moving average or a difference between the closing price for two periods, but it can also be more complex as standard deviation or linear regression. 

Forex Indicators: Overview

It’s tough to pick an indicator for a trading strategy. Some traders experiment with only one indicator, while others try to use a combination of indicators. If you want to use only one indicator, you’ll be focused on what time frame to use and what period you want to analyze. To calculate an indicator, you first need to choose the time frame. You can apply it to daily data, weekly data, hourly data or even higher frequency data. If you pick the daily data, you can calculate a moving average for the last 200, 100, 50 days and so on. Your strategy could be based on a couple of moving averages or you can try to use only one on your time series.

A combination of indicators is more complex. Besides choosing the time frame and the period, you need to choose indicators that complement each other. It’s usually recommended not to use two indicators from the same group of indicators because they’ll just confirm each other’s signals. The main groups of indicators are trend indicators, momentum indicators, volatility indicators and volume indicators.         

Type 1: Trend indicators

Average Directional Indicators

“Trend is your friend” is a well-known saying. Average Directional Index is one of them. It has three components, Plus Directional Movement Index (DI+), Minus Directional Movement Index (DI-) and ADX line. If DI+ is higher than DI-, the currency pair is in an uptrend. If DI- is higher than DI+, it is in a downtrend. The ADX line is a smooth moving average of absolute values of DI+ and DI- and its value is in a range between 0 and 100.

If the ADX value is between 0 and 25, there is no trend or it is very weak. Between 25 and 50, the trend is strong, and the trend is very strong if ADX values are between 50 and 75. Extremely strong trends have values between 75 and 100. The default period for ADX is 14 bars or candles, but you can experiment with different periods.

Moving Averages

Moving averages can also be useful to identify a trend and the easiest way is to plot one simple moving average on a chart and check if the price is above or below the moving average. If it’s above, that would be a signal that the currency pair is in an uptrend. You can also use two moving averages, for example, 100-day and 200-day MA. In that case, you would get a buy signal when the 100-day MA moves above the 200-day MA.

Parabolic

Parabolic SAR is pretty simple to use. Technical analysts draw it on a chart as a series of dots, above or below a candle or a bar. When it is drawn above the price, that is an indication of a bear market. The indicator is good for spotting reversals. If the dots shift from above to below, you can interpret that as a start of an uptrend. A possible strategy could be to wait for a shift and buy when four dots in a row appear below candles.

Type 2: Momentum Indicators

This group of indicators measures the speed of a price change and they are also called Rate of change indicators.

Relative Strength Index

The Relative Strength Index or RSI can help you to figure out if the currency pair is overbought or oversold. The default period for calculation is 14 candles or bars and its value oscillates between 0 and 100. The RSI value of 70 or higher is considered as overbought territory, while a value below 30 usually means that the currency pair is oversold.

Moving Average Convergence Divergence

Moving Average Convergence Divergence, or MACD, is another momentum indicator. It has the MACD line, signal line and MACD histogram. The MACD line is usually calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. The signal line is a nine-day EMA of the MACD line and the MACD histogram is the difference between the MACD line and the signal line. In a trading strategy, traders can look for crossovers between the MACD line and the signal line, but they can also look for a divergence between the price and the MACD. If the price records two rising highs and MACD records two falling highs, that would be a bearish signal.  

For momentum, you can also use the stochastic oscillator and Ichimoku Kinko Hyo. The stochastic indicator is used to identify overbought and oversold conditions, while Ichimoku Kinko Hyo represents a combination of support and resistance levels, crossovers, oscillators and trend indicators.  

Type 3: Volatility Indicators

Bollinger Bands

Bollinger Bands can help you measure the volatility of a currency pair. To draw on a chart, you first need to calculate a standard deviation of a price. Then you add two standard deviations to a moving average and you also deduct two standard deviations from the moving average.

Now you look for the moments when the price gets above the upper band or below the lower band. Some traders would see the breakout above the upper band as a signal of a continuation of the move, while others would see it as the reversal sign.

Average True Range

Average True Range is calculated as EMA of the true range, which uses the greatest value of the difference between the high and low price of the day, high and close or close and low. It is used to measure volatility and it can be useful as a risk management tool.

Type 4: Volume Indicators

Chaikin Money Flow

Indicators can also include volume in the calculation. Chaikin Money Flow (CMF) is one example. Its possible range of movement is between 1 and -1, but it usually moves between 0.5 and -0.5. Values higher than zero indicate a buying pressure, while values below zero indicate a selling pressure.

Accumulation Distribution Line

Accumulation Distribution Line also uses volume. It is used to confirm the trend. When it moves in the same direction as the price it signals the confirmation of the trend.

Final Thoughts

There are many forex indicators out there, and as a trader, you have to use those that can help you make money. One approach would be to include a combination of indicators in your strategy. You could pick one indicator from each group. You could also use only one indicator, but you could apply it to different timeframes.

You could decide to get a long position if your indicator makes a bullish signal on five minutes, 30 minutes and one hour chart at the same time. Before you trade any strategy, you should first test it on historical data. If it generates profitable trading signals in backtesting, you could then use it in a demo or live trading.

Get a Forex Pro on Your Side

FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets plus spot metals with low pricing and fast, quality execution on every trade. 

You can also tap into:

  • EUR/USD as low as 0.2 with fixed $5 commissions per 100,000
  • Powerful, purpose-built currency trading platforms
  • Monthly cash rebates of up to $9 per million dollars traded with FOREX.com’s Active Trader Program

Learn more about FOREX.com’s low pricing and how you can get started trading with FOREX.com.

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