Forex Indicators



You’ve probably heard of forex indicators, trading signals, and the like. But what are they, really?

If you search the internet, you will likely find a bazillion different technical indicators, but are technical indicators the only type of forex indicators?

The answer is no.

In this piece I will give you an overview of the different kinds of indicators.

If you want a deeper treatment of each, don’t worry I’ll add more detailed pages on each, and link them here (for your easy access of course).

Let’s start with the basics.

What are Forex Indicators?

Forex indicators are any kind of trade signal. What do I mean?

A forex indicator may show a high probability trade for you to decide on.

For example,

If you use Bollinger bands, there will be times in which a currency pair might be oversold.

This means sellers are losing steam, and price should move back up soon.

In such case, Bollinger bands, a forex technical indicator, gave you a trade signal of “Buy now”.

Of course, nothing is ever easy.

If you could just log into your account and wait for software to say “buy” or “sell now”, everyone would be rich (or no one would be rich).

Tell me… should I buy or should I sell?

So what’s up? Why isn’t this the case?

That’s because there are different kinds of indicators. They each measure something distinct, and as such, can’t possibly account for everything that’s going on in the markets.

I will broadly separate indicators into technical and fundamental (economic), but the truth is, there’s many different kinds of indicators within each of these buckets.

In truth, each indicator is unique in its own way (with a few being pretty similar).

Technical Indicators

We mentioned Bollinger bands above.

This is a type of technical indicator.

But technical indicators can be leading or lagging (so can economic indicators such as CCI).

Where leading means they suggest a trend is forming.

And lagging confirms a trend has begun to form.

In the case of our Bollinger friends, they confirm a trend.

What does this mean?

After a trend has begun to unfold, this indicator will tell you it’s ok to jump into the trend.

However, as you can figure out by now. It may be too late by the time you jump in.

Or at best, you didn’t catch on the full swing of the trend, leaving money in the table.

There are hundreds of lagging indicators, but another popular one is moving averages.

A moving average is a simple or exponential average of past prices (as many days as you want to average).

Some traders use both a short term and long term moving average.

Why?

The short term one is more responsive to recent price action.

While the long term one might signal a general trend (over a longer period of time).

These traders believe in trading when the short term average crosses the longer term one.

Imagine two lines moving up (short one above long one) and then price starts moving down until the short line crosses the long line and continues to go down!

No. They don’t quite look this way.

Now this may signal a downtrend, or an end to the previous uptrend.

There are other indicators which employ moving averages as part of their formulas, like the MACD.

But I will not delve much deeper in this one article.

What about leading indicators?

These types of indicators are also called oscillators.

Why? Because that’s how they work. They measure a number within a range (say 0 to 100) and signal buy or sell based on where the number is in the range.

An example is the Relative Strength Index (RSI). It goes from 0 to 100.

When it’s between 0 and 30, you have an oversold market (a “buy” signal) and when it’s between 70 and 100, you have an overbought market (a “sell” signal).

Ok so what’s the problem with this leading indicator?

It signals a trade before a trend has been confirmed.

This is good because you can ride the whole move and make every pip possible.

It’s bad, because there may be no trend at all… yep, that’s bad.

Now, you may think mixing both types of technical indicators will give you an edge.

And while it’s true you will have more info, this isn’t a catch-all at all.

You will frequently get different signals from your indicators, which one do you believe, if at all?

And even when they’re all aligned, do you really have a winning trade?

If all you do is look at technical indicators, you may be surprised by unforeseen events in the markets.

Which takes us to the fundamental analysis part.

Economic Indicators

Economic indicators are a different breed.

They consist of economic agency data such as current account, trade balance,  GDP numbers, CPI (prices), PPI, sentiment indexes like the IFO and Michigan, and employment reports such as unemployment and Non-Farm Payrolls (NFP), just to name a few.

What’s the significance of this type of indicator?

A currency pair price, the exchange rate, depends heavily on the economic forces of demand and supply.

What better way to predict where price will go, than by analyzing these two driving forces?

This what we call fundamental analysis, and at its root we have economic indicators.

How many (bad) traders see economic indicators.

I’ll go into more detail in another page, but the general idea is:

A strong economy will generally have higher demand for its currency. Think of the USA and the American dollar (USD).

So paying attention to how the economy is doing (economic indicators such as Industrial Production, or durable goods orders) is a good way to approach this.

However, as I detailed in Forex economics, it’s much easier to pay attention to currency supply, by checking out what Central banks are doing.

Is the FED waiting for the employment report?

Or are they more concerned with inflation?

Whatever they’re paying attention to is what the markets will care about.

Since Central Bank moves have far-reaching effects on currency prices (pair price or exchange rate).

In conclusion, one of, if not the most important type of forex indicator is the economic indicator.

Which Forex Indicators should you use?

The best approach…

The one used by professional traders, is to start with fundamentals, and apply technical before executing a trade.

In this fashion, you will first pay attention to the economic indicators most important for the markets at the time.

Hence, you will get an idea of where price will go, given market sentiment, and how economic fundamentals are doing.

With this, you will have a trade idea.

Before entering the trade, you will use some technical indicators (preferably Fibonacci’s or pivot points), and if most if not all forex indicators (both fundamental and technical) support the trade, well…

You just got yourself a high-probability trade.

Sure, you still have to manage the trade well (psychology is another incredibly important aspect), but at least you know what types of trades to enter.

To me, that’s the real forex signal.

There you have it.

A 10,000 foot view of forex indicators. Don’t forget to hop into Forex Economist Daily in the form below.

 

See you soon,

 

Emil Christopher

The Forex 

> Forex Indicators



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