This article has been inspired by the beginners I speak with about trading and it will help answer one of the common questions they often ask.
What are the best Forex indicators to use when trading?
I hope people that have been trading for some time find the information I am about to share useful too.
So in this one, I am going to give you my 5 best Forex indicators to use. I will also explain why I think they are the best Forex indicators and show you how to use them in your trading.
Also, you will want to stick around to the end.
Because I will be sharing a special promo code so you can get the VIP Black account at TIO Markets for $500 instead of the usual $3000.
I am not a fan of drawn out introductions, so let’s just get started.
These are in no particular order and each indicators usefulness increases when used as part of a comprehensive trading strategy. Using multiple indicators together will help you make better informed trading decisions.
The First Best Forex Indicator is Economic Data
The first Forex indicator on my list is high impact economic data.
The data is easily accessible from the economic calendar. This covers events and data releases for the forex market. One is available on TIO Markets website.
What this calendar does is inform traders of up and coming economic data releases and these data releases have the potential to impact currency prices.
The reason why the economic calendar is one of my best Forex indicators is because it informs me ahead of time whether I can anticipate price volatility in the marketplace.
The benefits from paying attention to the economic calendar when trading are many.
This shows what economic data is released, when it will be released and the impact it will have on the currency. These red dots that precede the data that is going to be released are the important ones to pay attention to.
Many traders wait for the actual data to be released before trading, others speculate what the actual data will be and trade accordingly ahead of time, and some avoid trading leading up to the event or around these times.
Use economic data like a set of traffic lights.
All approaches have their benefits and risks but I have discovered through experience that the best way to use this Forex trading indicator is like a set of traffic lights. These data announcements speeds the price action up or slows it down and this helps me to synchronize my decision making with the flow of the market.
As a short term trader, I am not so concerned with what the actual data is. What I am more concerned about is if they will act as catalysts for significant price movements.
The economic calendar can be used to support your technical view and market timing.
You can find the economic calendar easily enough with an internet search. There is also one available on TIO Markets website.
Best Forex Indicator Number Two: Sentiment
The second forex indicator on my list is related to sentiment.
Sentiment indicators can help you gauge what the general opinion is of the other market participants from the positions they have taken.
Sentiment should be used as a contrarian indicator, to help you form a direction bias regarding what direction you should be trading in.
It is not 100% accurate, like any other forex indicator but you will get a cross sectional view of the market place and you can use sentiment to make better informed trading decisions.
Since most people lose money trading and usually get the direction or the timing wrong, you can use this Forex indicator to do the opposite of what the majority are doing.
So if you see that most people are long the GBPUSD, it might be a good idea to look for sell opportunities and vice versa if most people are short.
You can check what TIO Markets clients are doing by visiting the sentiment page on TIO Markets website to help you make better informed trading decisions.
The Third Best Forex Indicator Is The ATR
The ATR, which is an acronym for Average True Range, is one of my favorite Forex indicators.
It helps you to think in terms of probabilities and risk.
If I had to recommend one indicator from this list that you should investigate further, it would be this one.
I will tell you why in just a minute but first, let me explain what this forex indicator is and what it does.
The ATR indicator measures and records the average true price range, for any given time interval. This measurement is taken from the distance between the highest and lowest price for each trading interval or candlestick. Then it adds them together and divides the distance by the number of intervals the indicator looks back for.
This provides us with the average price range.
So an ATR of 10 on the daily price chart would calculate the average daily price range for the last 10 days. An ATR of 1 would just give us the true price range for each of the previous days.
The reason why this indicator is so useful is because it measures volatility and shows us how much a currency pair has moved, or how far it might likely move in the future.
Knowing this can significantly improve your decision making process because you will have a better idea about how much room the price still has to move as the trading day, week or month is unfolding.
This can be of huge benefit to a trader in several ways. First, it helps you determine whether you should initiate a trade. Second, it helps you identify likely price objectives and safer stop loss areas. Lastly, it can help you estimate how long the trade might take.
I am going to show you an example using the GBPUSD.
I have added the ATR indicator on the daily time frame. The indicator is showing me that the average true range for this currency pair is 112 pips over the past 10 trading days.
I can also see that 40% of the time, the daily price ranges exceeds the average but most of the time, it is close to the average or less.
Looking back even further to 50 days, the GBPUSD’s daily price range exceeded the average daily price range only 21 times. Or 42% of the time, the price moved more than the daily average.
Now that I know what this currency pair is capable of doing and what it might likely do, I can make better trading decisions as the day is unfolding.
So if it is halfway through the trading day and the price has been stuck in a 40 pip price range, I know that there is a good probability that the price will seek new highs or lows.
I can see from the histogram that, it is very unlikely that the daily price range will remain at or below 40 pips.
On average, the price can move another 72 pips beyond the current day’s high or low.
If it is halfway through the day and the price has already exceeded its average range, then it might be a better idea to not initiate any trades seeking further price movements beyond the current high or low.
But this is only for the day, when a new trading day begins; there will be a new price range.
This can be applied to any time frame and for any trading style.
You can do the same analysis for the weekly ranges and the monthly ones.
The fourth best forex indicator is price
The fourth indicator to make my list of best forex indicators is Price.
Trading by analysing the price and the price alone offers a level of simplicity and insight that would otherwise be obscured to you when trading.
Unlike other technical analysis indicators, price doesn’t lag or smooth out the details.
However, some traders overlay too many other indicators on their charts and that distracts them from it.
So my suggestion would be to bring your focus back to price and to the essence of what you should be doing as a trader. This is, buying when the price is relatively cheap and trying to sell for a profit when the price is relatively expensive.
I am going to give you three simple techniques using price only that you can apply to your trading.
The first one helps you to identify the perceived fair value of the currency pair.
You can get a decent idea what fair value is by looking for price areas on your chart where price seemed to gravitate towards the most.
Here is an example
The most popular price for the GBPUSD since February of this year seems to be 1.3850. You can tell this just by looking at how many times the price visited and traded around this area. Price didn’t stay above or below it for long before reverting back to 1.3850.
When price was above fair value, it was relatively expensive and reverted back towards it. When price was below fair value, it was relatively cheap and reverted back towards it.
You can look for these popular price areas on your charts then look for signals to trade back towards them. There will be shorter, medium and longer term fair value areas so use multiple time frames.
Another simple technique you can apply to your trading is to use price to locate areas to buy and sell from.
Look at this chart; I have marked all the big round numbers with green horizontal lines. What I mean by big round numbers are the whole numbers, like 1.3800, 1.3700, 1.3600 and so on.
Notice how often the price bounced around these prices. They are significant psychological numbers that can support or reject price.
They can be used to initiate trades from or as profit targets.
This can also be taken a step further with the 50’s in between. Like 1.3850, 1.3750, 1.3650 and so on, for even greater precision or for shorter term trading styles.
The third and the last technique I want to talk about for using price as an indicator is related to recent highs and lows.
Through observing price behaviour over a long enough period of time, I can confidently say that price is always seeking to trade back towards relatively recent highs and lows.
When the price trades up and makes a high and then reverses and makes a relative low, price will not stay confined between these points for long. Of course, the time frame you are looking at will determine whether it will happen sooner or later but it is just a matter of time.
You can use recent highs and lows in the price as profit objectives and something to aim for.
Recent highs and lows, the round numbers and popular prices are very useful indicators you can use in your trading. They act like magnets for price.
Price is simultaneously moving away and towards them. Which leads me in to the fifth and final best Forex indicator on this list.
The last Forex indicator on the list is time
The last forex indicator to make the list is time.
Along with price, time is the other necessary variable needed to create the charts we look at. So, it stands to reason that it is an important indicator for forex trading.
When you combine time with price, your trading strategy can be even more accurate than what it was before. Price can help you determine where to trade but time will help you to determine when to trade. In forex trading, being in the right place at the right time helps you to capitalize on opportunities.
Furthermore, when you factor time in to the decision making process, you become more patient. This is a trait that all successful traders have.
Therefore, if you can wait for the best times to trade, you will improve your probabilities of making successful trades.
These best times to trade are around the beginning of the major trading sessions.
I will explain when this is, and you will have to convert these times to your local time.
Every forex trading day has 3 trading sessions. The first session is the Asian session, the second is the European or London session and the last session is the US session.
The times for these sessions are marked by the opening of the major financial centres for each region. For the Asian session, it is usually recorded from the beginning of the business day in Australia and the action picks up a little when Japan comes online. For the European session, it begins with the opening of the business day in Germany and the United Kingdom and the US session starts when the United States comes online.
As each of these trading sessions opens and closes, they overlap for a short period of time. During this time, the volume of transactions increases because more market participants are present.
The Asian session is usually the slowest. It is usually characterized as range bound with lower levels of liquidity and spreads might be slightly wider at too. Things start to pick up as the European session begins but the busiest time during the trading day is usually at the start of the US session.
When you next get on to your charts, look at what the price has done around these times. What usually follows is a price burst early in the session, which is what you want to happen shortly after you have initiated a trade.
So when you use time as an indicator in trading, you can execute trades around the times when volatility tends to increase and maybe, that will help to push the price in the direction of your trade. Without consideration of the time element in your trading, you might find yourself initiating trades and waiting for prolonged periods of time for the price to move. All the while, increasing the risk, getting frustrated and then becoming emotionally motivated to make trading mistakes.
Let’s recap with a summary
Economic data and news announcements are fundamental drivers that affect currency prices. The economic calendar will help you keep your finger on the pulse of the market. News announcements act as catalysts for explosive price movements that you can take advantage of.
Use sentiment indicators to give you an insight in to the psychology of the other market participants. The majority are usually wrong and lose money trading. So when sentiment indicators are bullish or bearish, consider trading opportunities in the opposite direction.
Use the ATR indicator to better understand the performance of what you are trading. Each currency pair has unique characteristics and levels of volatility. Some are fast, some are slow, and some are more volatile than others. When you know the average daily weekly and monthly ranges for what you are trading, you can make better informed trading decisions. The ATR indicator can help you to set better profit targets and stop losses because you will have a better idea about how far the price can potentially move.
When trading, your primary focus should be on the price. Analyzing price can help you to determine the price trend, fair value, and whether price is relatively cheap or expensive in relation to that. The price likes trading towards and away from the big round numbers. Pay attention to them, they are significant psychological levels.
Finally, consider the element of time when trading. Price behaves differently depending on the time of day and the trading session that is active. The best times to trade on an average day is when the major trading sessions overlap.
I hope you found something here that you can study further or apply to your trading.