Understanding Simple Forex Indicators
Many new traders find themselves wasting countless hours awash in a sea of different indicators and whilst a small fraction of these can eventually be quite useful, the majority are a total waste of time. The list of indicators is endless, from classic indicators in use for many years through to the latest custom indicators for sale on internet forums. However, there are some simple Forex indicators that traders can focus on above the others to find success.
So what are these simple Forex indicators?
The RSI indicator is a classic technical indicator used by traders to measure momentum in the market. The indicator measures gains against losses over a specified period looking to identify conditions as either overbought or oversold.
The default look-back period for the indicator is 14 with the thresholds set to 30, to signal oversold conditions, and 70 to signal overbought conditions.
The beauty of the indicator lies in its simplicity and strategies typically employed by traders using the RSI indicator include looking to fade price once the indicator moves into extreme territory, looking to establish divergence between price and the indicator and looking to trade RSI breakouts.
The Stochastics indicator can be thought of as a more advanced momentum indicator which measures the closing price of an instrument against a recent range over a specified period, again looking to identify conditions as either overbought or oversold. Unlike the RSI indicator, the stochastic indicator has two lines, the K line and the D line which is a moving average of the K line.
The relationship between these two lines gives the stochastic indicator improved accuracy and typically, the way that traders will use indicator is to wait for the lines to move into oversold territory then sell when the K line crossed back below the D or similarly, wait for the lines to move into oversold territory then buy when the K line crosses back above the D line.
Also, as with the RSI indicator, traders can look to identify divergence between the indicator and price.
Moving averages are one of the most widely used, simple Forex indicators. Essentially the indicators plot a visual line onto the charts indicating the moving average of price over a specified period.
Some common ones are the 21 day, 50 day and 200 day moving averages. There are many different types of moving average such as exponential, weighted, smoothed and more, though none are dramatically different.
The way these indicators are used is, where a trade is just using one moving average, price is seen as bullish if it is above the average and bearish if it is below. If the trader is using two or more moving averages, then essentially they are looking to identify a crossing of the averages to initiate trading positions whereby a shorter term moving average such as the 21 day crosses either above (for a buy) or below (for a sell) a longer term moving average such as the 50 day.
Here at Littlefish FX we have actually designed some of our own simple Forex indicators for you to use. These indicators use some similar concepts and have the benefit of our own experience and research in the markets.
Order Flow Trader
Order Flow Trader is an indicator designed to help traders identify and capitalise on trends. Analysing volume and the direction of orders in the market OFT uses neat visual cues to highlight the direction of trend and identify the presence of volume.
Typically, the trading of this indicator is very straightforward; look to join trend where they are identified, covering positions or managing risk where volume is indicated to have dried up, signalling a potential end to the trend. The indicator can be traded as a stand-alone, or combined with other indicators such as RSI and Stochastics.
This indicator is a modern twist on a classic, the ATR indicator. Essentially what we have done with this one is improve the way you can use ATR in your trading by converting the indicator to actually depict the ATR range onto you charts with an upper and lower boundary.
Typical strategies using this indicator seek to fade price as it moves into the boundaries, anticipating a reversal. The indicator is also incredibly useful in terms of setting stop sand targets on trades in consideration of volatility.
Our Psychology indicator is a great twist on typical momentum indicators, considering the magnitude and direction of each candle to highlight directional bias. Instead of signalling conditions as overbought or oversold, the indicator gives a directional signal. Again, the indicator can be used as a stand-alone or in conjunction with other indicators such as our own Order Flow Trader or other simple Forex indicators like RSI or Stochastics.
Hopefully this quick summary gives you an idea of the different types of simple Forex indicators you can look to build into your trading and analysis. We explore each of these indicators, including full trading strategies, within our Forex trading course.