Most strategic Forex traders consult a combination of technical, fundamental and market sentiment indicators before making their trading decisions. Key Forex Indicators Technical indicators are used to generate forex trading signals, as well as to show the direction of the prevailing trend, the level of its directional momentum and other market characteristics useful to traders. Su…
Some of the best forex indicators are analysed here, in order to allow you to make a better informed decision on which strategy may be suitable for your forex trading requirements.
Key Forex Indicators
Technical indicators are used to generate forex trading signals, as well as to show the direction of the prevailing trend, the level of its directional momentum and other market characteristics useful to traders. Such indicators are computed from forex market observables, like the exchange rate, trading volume and open interest.
Trend indicators give traders an idea of which direction a currency pair is moving. They are usually superimposed over the exchange rate chart.
Moving Averages – A lagging indicator that smooths exchange rate movements by taking an average over a given time period that is then moved forward in time.
Bollinger Bands – A set of bands plotted two standard deviations up and down from a central moving average that acts as a trend and volatility indicator.
Williams Alligator Indicator – A set of three smoothed moving averages of differing time periods shifted into the future by several bars and used to generate trading signals.
Parabolic SAR (Stop and Reverse) – A series of dots drawn either above or below the exchange rate that shows when market momentum is changing direction to indicate possible market reversals.
Oscillators are usually displayed in an indicator box below the exchange rate chart. Some oscillators like the RSI are bound within fixed value limits, while others like the MACD lack such limits.
The Relative Strength Index (RSI) – A bounded momentum oscillator that compares the size of recent gains to that of recent losses observed over a particular time period.
The Average Directional Movement Index (ADX) – A bounded trend strength lagging indicator computed over a number of periods and used with the positive and negative Directional Indicators (+DI and –DI) to generate trade signals.
The Moving Average Convergence Divergence oscillator (MACD) – An unbounded momentum oscillator computed by taking the difference of two moving averages (usually the 12 and 26 day
Williams Percent Range (%R) – A momentum indicator comparing the market close to a range observed over a period that shows overbought and oversold levels.
The Stochastics Oscillator – A bounded momentum indicator that compares a closing exchange rate to its range over a particular period to compute its %K line, which is then compared to its MA called the %D line to generate trade signals.
The Momentum Oscillator – An unbounded indicator that measures the rate of change of exchange rate closes to determine trend strength. Used to identify probable market reversals at extreme points or when divergence exists.
On Balance Volume – An unbounded indicator that compares trading volume to exchange rate movements to measure accumulation and distribution levels. Used to indicate breakouts and reversals.
Key Fundamental Forex Indicators
Fundamental indicators are used to determine how healthy a country’s economy is and how that might affect the relative value of its currency. An economic calendar helps forex traders anticipate the release of such indicators. Markets react most when the actual result differs significantly from what was expected.
Central Bank Monetary Policy Decisions, Rate Statements and speeches – Indicate the likely direction of benchmark interest rates set by central banks.
Employment Numbers (Payrolls, Unemployment Claims, Unemployment Rate) – Indicate the level and health of the jobs sector of an economy.
Gross Domestic Product (GDP) – Shows the value of what an economy is producing.
Trade Balance – Shows how much of a deficit or credit an economy is running with its trading partners.
Retail Sales – Indicates how much consumers are spending and on what items.
Consumer and Producer Price Indexes (CPI and PPI) – Inflation indicators that show how much prices are rising.
Purchasing Manager Index (PMI) and Consumer Confidence surveys – Economic sentiment surveys considered leading indicators.
Key Market Sentiment Forex Indicators
Market sentiment indicators like COT report show how large a percentage of trades and how many traders of what types have taken a particular position either long or short in a currency futures contract. Also, open interest shows how many open futures contracts exist in a currency pair, while trader sentiment surveys ask participants about their market views. Such sentiment indicators are especially useful when they approach extreme levels that have previously resulted in market reversals, which can differ between currency pairs.
The Commitment of Traders (COT) report – Released on a weekly basis by the CFTC showing how different types of futures traders are positioning themselves.
Futures and Options Open Interest – The total number of exchange traded derivatives contracts that have not been closed out.
Trader sentiment surveys – Performed by various polling techniques to determine what market view those surveyed have.