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Best Forex Indicators Explained: Understanding Different Types of Indicators

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Most foreign exchange market traders spend a majority of their time waiting for the perfect moment to enter the market, make a splash, and walk out with a couple of millions. Of course, if you know more about the forex market than the things you read in those “would you believe it” face ads, then you know that things don’t necessarily function like that. 

Some forex traders spend months – some even spend years – before making a profit. Making a couple of millions takes a lot more time and patience. You can’t wait for the right moment or a telltale sign to enter the market. You need to enter it as soon as possible if you want to get enough knowledge and experience to become a full-time trader in the near future.

Once you learn the tricks of the trade, the money will come along. How can you start trading? Well, there’s no one way to trade forex. There are plenty of ways to do it. For that reason, traders need to learn a wide variety of indicators that will help them determine the right time to buy or to sell their forex pairs. Today, we’re going to talk about the best forex indicators

Here are a few market indicators successful foreign exchange traders rely on… 


Forex Indicator #1: Overbuy/Oversell Tools

After you choose to follow the direction of a major trend, you need to decide whether you’re comfortable jumping into the situation when the trend is established or after a pullback. In short, if the trend you’re following is determined to be bullish, your only choice will be whether to buy when the trend is strong or when it’s weak. 

If you decide to get in on the action quickly, you should consider trading your currency pair as soon as you confirm an uptrend or a downtrend. Conversely, you can wait some time for a pullback to happen within the larger trend and hope that it will lead to a lower-risk opportunity. In order to do this, you need to rely on overbuy/oversell indicators.

Many indicators can help you do this, however, one that’s useful from a trading standpoint is the 3-day RSI – or the Relative Strength Index. It calculates the sum of up and down days over a certain period and helps you come up with a value that ranges from 0 to 100. If the price action is on the up, the indicator will be close to 100 and when it’s on the down, it will be close to 0.  

Forex Indicator #2: Profit Taking Tools 

In the second spot on the list, we have an indicator that can help you determine when to take the profit from a trade you won. Now, there are many choices that fit this description, for example, the aforementioned RSI would be a sensibly good choice. However, we decided to go with the Bollinger Band, a popular indicator, used by thousands of traders.

Why do so many people use this particular indicator? Well, the tool takes the classic deviation of price changes over a certain period, adds and subtracts the sum from the average closing price over the same period, and creates the so-called “trading bands.” Although many people use these indicators for entry of trades, it’s more useful as a tool for profit-taking. 

Forex Indicator #3: Trend Following Tools

You can take the counter-trend approach to trade and still make a healthy profit. Of course, for most people, the easier approach is quite the opposite. Recognizing the direction of a major trend, trading in its direction, and making a profit sounds much simpler. 

If you want to take a simpler approach – and why wouldn’t you – you need to have some trend-following tools by your side. A simple moving average is one of the most popular tools when it comes to trend following, so we recommend you get familiar with it and use it. 

Forex Indicator #4: Trend Confirmation Tools

Following a trend is one thing but what if you’re not even sure that you’re dealing with a trend in the first place? Some indicators aren’t that reliable. You may never know whether you’re dealing with a phantom trend or a real one. You need to research to confirm it.

For that, you need to employ trend confirmation indicators. Similar to trend-following tools, confirmation indicators may or may not be intended to generate specific signals. Conversely, trend-following tools give you confirmation that the trend is happening and that you should follow it. What tools do we recommend?

One of the most popular trend-confirmation indicators is surly MACD, which measures the difference between two moving averages. The difference between the two is smoothed and compared to another moving average to confirm whether the trend is occurring. 

Closing Thoughts 

Even after reading this, you’re still feeling hesitant to get into forex? Do you still want to wait for a couple of months before doing so? Now, we have to ask the question – do you feel that if you wait long enough, an actual sign from the universe will come along? That just sounds ridiculous. We’re sure that you’d agree with us on that.

Instead of sitting around and reading Internet articles, you need to go out there and start hustling. Talk to more experienced traders, get into trading groups on social media, and start frequenting dedicated forex forums to learn the tricks of the trade. Only once you start talking with genuine traders with the first-hand experience will you start learning something for real. 

Also, don’t forget to learn everything you can about the different forex indicators. The ones we outlined above are just the best forex indicators, there are plenty of others out there. Some of them will fit your trading strategy. Others will not. But you have to learn how to differentiate which ones are a good fit and which ones aren’t. Go out there and start learning from experience.