What are the Best Technical Trading Indicators for Forex?

February 21, 2016 Forex Trading Articles

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Have you ever wondered what technical trading indicators to use in your forex trading? If you are, then this article will surely appeal to you. When you decide on your technical analysis trading strategy, you should carefully choose your trading weapons! And though my personal style of trading involves more pure price action analysis rather than the use of indicators themselves, I do believe that they can be very useful when applied correctly. Today we will go through some the top technical analysis indicators for Forex trading. We will discuss the signals we can get from these indicators and the way you can incorporate them into your own Forex trading approach.

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Forex Technical Indicators

The technical analysis indicators, we will be discussing could be leading or lagging based on the time at which they provide a signal.
Leading indicators are also called Oscillators. These are the Forex technical indicators which give you an entry/exit signal before the actual occurrence of the respective event.
Lagging indicators are typically Trend-Confirming Indicators. Lagging indicators give confirmation signals after the actual occurrence of the event. These are the trading indicators, which would give you a confirmation signal that the trend on the chart is underway.
Let’s now go through the best technical indicators for Forex Trading:

Leading Indicators (Oscillators)

Leading indicators are the indicators, which manage to give you a preliminary signal. This means, that a leading indicator could put you in the market in advance of the potential move, Keep in mind that even though leading indicators can get you into a trade at the beginning of a new leg, many times you can and will get false signals along the way.
Therefore, traders often combine more than one leading indicators in order to eliminate as many fakeouts as possible. Let me now show you two of the most widely used leading technical indicators in Forex! These are the Stochastics indictor and the RSI indicator.

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Stochastic Indicator 
The Stochastics indictor was created by George Lane, and is one of the most popular indicators around. I, myself, had the pleasure of meeting George Lane back in the late 1990’s and spent about a week learning his trading methods. But that’s a story for another day. In essence, the stochastic indicator is used to determine overbought and oversold conditions in the market. In other words, the Stochastic can sometimes tell you that there is too much buying in the market and prices could be due for a correction. If the signal is oversold, then the Stochastic is telling you that maybe there are too many selloffs with this currency, and a possible rebound is due.
The Stochastics indicator consists of two lines which move together and interact with each other at some point. In addition the indicator has an upper and lower zone .The upper area is the overbought area and the lower area is the oversold area.
When the two lines enter the lower area, the Stochastic is giving us an oversold signal. In this case, we can buy the currency pair when the two lines cross upwards on their way out of the oversold area. If the two lines enter the upper area, the Stochastic is telling us that the Forex pair might be overbought. Then we can sell the pair when the two stochastic lines cross downwards on their way out of the overbought area. These are the two basic signals which the Stochastic Oscillator gives us.
However, the Stochastic is also very useful for divergence trading. If you do your technical analysis using the Stochastic, you will often notice that the indicator is moving upwards and the price is moving downwards, or the opposite. These are bullish and bearish divergences. If there is a bullish divergence between the price and the Stochastic, we can anticipate a possible price increase. The opposite is in force for bearish divergence. Now let’s take a closer look at the Stochastic Oscillator:

This is the H4 chart of the EUR/USD for the period Dec 16, 2015 – Jan 20, 2016. On the bottom of the chart you will see the Stochastic Oscillator.

• The first black arrow shows us the Stochastic in the oversold area. Stochastic breaks upwards and the price starts increasing.
• Then we have an overbought signal. A decrease comes right afterwards.
• A new oversold signal sets the beginning of a new bullish trend.
• The next overbought signal leads to the biggest decrease on this chart.
• On its way down the Stochastic gives us one false oversold signal.
• Then we get the real thing – an oversold signal which puts us in a big long position.
• The next signal is tiny and it hints for an overbought market. The price move is tiny too.
• Then we get a new overbought signal and we get a better downward move.
• On its way down the Stochastic gives us a false signal.
• Finally we get the last signal – oversold. We ge