Given that there are so many indicators out there, some are obviously optimized for certain kinds of trading.
Trend traders need to focus more on certain aspects than day traders. So, trend traders developed indicators that meet their needs more specifically.
Of course, each person’s trading is different depending on personal factors. And you can’t rely on just one indicator! But, usually, the most popular indicators are popular for a reason.
In fact, some can be so popular that they become something of a self-fulfilling prophecy. Let’s go over a few of the indicators that experienced forex traders keep turning to, and vouching for their usefulness.
A quick note that most people don’t mention: forex as a unique and popular trading discipline is relatively new.
This means that most of the indicators that we use were developed with other assets in mind, such as stocks, bonds, commodities, etc. This means that their performance can be somewhat different than originally designed when you apply them to the forex markets. It’s helpful to keep that in mind when deciding to incorporate an indicator into your arsenal.
A Look Under the Hood
Trend traders are, as the name suggests, looking to identify trends to trade on. There are two parts; one is identifying a trend as it’s going along, and the other is identifying when a trend is starting and ending.
Ideally, a good indicator will be able to do both, but some are better at one job or the other.
The simplest, and often, therefore, more practical, are moving averages. Most indicators are based off some form of sophisticated moving averages. So, having a grounded understanding of moving averages is helpful for any kind of forex trading. Because they are so basic, they are also among the most commonly used.
Moving averages smooth over the market for a period of time. This helps easily see where it’s trending. If you combine two moving averages, say a fast and a slow one, you’ll find that they cross over each other.
By definition, before a trend changes direction (ends a trend and creates a new one), the shorter MA has to cross over the longer one. Crossovers are so popular that they are almost seen as another indicator themselves.
MACD is probably the most popular forex trading indicator out there for any type of FX trader. And it’s no exception among trend traders!
As pointed out previously, it’s designed to identify inflection points in the FX market. It gives signals for when a new trend is being created, as well as showing a trend’s exhaustion.
This indicator often gets a lot of attention because it’s quite sophisticated and helpful for identifying trend reversals. In fact, that’s exactly what it was designed to do. However, it’s often misunderstood, and falls out of use among many FX traders.
This is a pity because it’s quite useful in the forex markets, especially when used in combination with another indicator.
It works by placing a dot next to the market graph, showing the direction in which the next reversal will be. In other words, if the market is trending up, the dot will appear beneath the graph. If the trend is downwards, then the dot will appear above.
It’s Good Backup
The Parabolic SAR indicator works best in a trending market. It gives you signals for when you can hop on and grab some points as the market keeps to it’s trend. A combination of the indicator in two or more time frames helps to take advantage of a shorter term trend, while keeping an eye out for a potential reversal in a longer timeframe.
What a lot of forex traders find it useful for is to set trailing stop losses, and shaving some risk off the market.
Since the parabolic SAR shows where a reversal will likely hit, it’s helpful for placing stop losses where you’ll get the action without getting stopped out.
Remember to thoroughly backtest your strategy and keep track of your forex trading to make sure you are getting the most out of the market. While these indicators are common and useful for FX traders, none are a sure-fire way to make money.
That’s why your judgment as a forex trader is always the most important!