The Value of Indicators: MACD, RSI, Stochastic Oscillator

When it comes to trading, it is widely accepted that there are two main approaches to your analysis of potential trades: fundamental analysis and technical analysis.

Technical analysis is widely used by private traders and is becoming more and more popular. It involves the study of a financial product’s actual price to form an opinion on the likely future direction in which the price will move.

Fundamental analysis involves assessing the broader economy and what may specifically impact the financial product or asset you are going to trade. It is most heavily used by traditional stockbrokers and fund managers.

One of the things that makes fundamental analysis work is that everyone in the market acts in a logical way. So, the prices of indices, commodities, and currencies will move in a way that makes sense based on fundamental factors.

For this reason, many market participants can be gripped by fear and greed and act in a manner that is anything but rational. The best way to counteract these emotional impulses is through technical analysis. Technical analysis is the study of actual movements in the price of a financial product. Despite what people may tell you, there are only two things that move prices: They are supply and demand—nothing more and nothing less.

When demand for something is greater than supply, prices rise. Conversely, if supply is greater than demand, prices fall. The cause of supply and demand for a financial product could be discussed for hours. But the interesting thing is that no one can be sure at any point why people may be buying and selling a product. Herein lies the beauty of technical analysis.

At no time does technical analysis attempt to determine why there might be supply and demand—only that there are certain levels of supply and demand. By studying actual movements in the price, we can determine the present levels of supply and demand for a financial product and what market participants may be thinking and, therefore, analyze it as a potential trade.

Indicators

A major component of technical analysis is the use of indicators. Indicators are the result of mathematical calculations done on price and volume data and are displayed on charts. Using indicators, it is possible to anticipate the direction of a price’s movement with a reasonable level of accuracy. It should be noted that no indicator is perfect, and no single indicator will be right all the time. Indeed, several indicators will often produce varying signals.

Read on for a look at some of the more popular indicators that are used.

Relative Strength Index

The relative strength index (RSI) is a very popular indicator that was developed in 1978. In theory, the RSI measures the internal strength of a price and is calculated by comparing the average upward price change with the average downward price change over a set period. The fewer periods you use, the more erratic the indicator becomes. A 14-period RSI is popular.

The RSI is plotted between the values of 0 and 100 and generally has reference lines placed at 30 and 70. The RSI can be interpreted in several ways. A popular approach is to buy and sell when the RSI crosses the reference lines. When the RSI crosses up above 30, this is interpreted as a buy signal, and when the RSI crosses down below 70, it is interpreted as a sell signal.

You can see an RSI plotted on a daily chart of the USD/CHF below with the 30 and 70 lines marked.

202010-RSI

Advantages to RSI

This technical indicator is easy to interpret on forex charts and offers insight into data points that can be very relevant when targeting price movements and momentum swings.

Disadvantages to RSI

The timeline for the price swings forecasted by RSI can be hard to determine, which can frustrate traders looking to time their trades wisely.

Moving Average Convergence Divergence

Another popular indicator is the moving average convergence and divergence, more commonly referred to as the MACD. Although the construction of the MACD is quite simple, it is nonetheless quite powerful. The MACD is simply the difference between a short-term exponential moving average and a longer-term exponential moving average. The most common combination is that of a 12-period exponential moving average with a 26-period exponential moving average.

Another line is plotted alongside the MACD for interpretation purposes and is called the signal or trigger line. The signal line is often a nine-period exponential moving average of the MACD itself. Both lines are then plotted on either side of zero. If the shorter-term moving average is above the longer-term moving average, the MACD will be above zero and vice versa.

You can see a MACD plotted on a daily chart of the USD/CHF below with the 30 and 70 lines marked.

202010-MACD

Advantages to MACD

This indicator is great for evaluating both momentum and trends and is more robust in the data points informing its insights than other indicators you may incorporate into your strategy.

Disadvantages to MACD

Because the time frame and other parameters of MACD are so frequently changed or customized, this indicator offers less of an objective frame of reference than other indicators and may mislead traders who customize the indicator to serve up more attractive insights.

Stochastic Oscillator

The stochastic oscillator is another popular indicator that is widely used by traders. The underlying premise is that when the price is rising, it tends to close near the high of a recent period, and when it is falling, the price closes near its low. The stochastic RSI measures the price relative to the high/low range over a set period, thus indicating where it is presently trading within its recent trading range.

The stochastic oscillator is plotted between the values of zero and 100 and has reference lines placed at 20 and 80.

When comparing stochastic RSI and RSI as technical indicators, it’s important to note when the stochastic oscillator crosses the reference lines. When it crosses up above 20, this is interpreted as a buy signal, and when it crosses down below 80, it is interpreted as a sell signal. Another way of interpreting the stochastic oscillator is to consider readings below 20 to be oversold and readings above 80 to be overbought.

You can see a stochastic oscillator plotted on a daily chart of the USD/CHF below with the 20 and 80 lines marked.

202010-Stoch

Advantages to Stochastic

The clear values for stochastic RSI offer clear entry and exit signals when planning your positions.

Disadvantages to Stochastic

When deciding between stochastic RSI and RSI as your go-to indicator, remember that both of these indicators don’t offer insights into the timelines you should expect when holding a position—which could push some traders out of their comfort zones.

Which Indicator to Choose?

Where there are hundreds of technical indicators that have been developed over the years, it’s easy to get overwhelmed by your options when building out a trading strategy. How can you know which indicators are the right ones for you? And, if there are so many indicators taking so many different approaches, why is it important to use indicators at all?

These questions have troubled traders for years—and there’s no end in sight. When looking for the right indicator to use, consider the indicators that have proven value to you, your mentors, or other forex experts you have learned to trust.

Numerous texts include the more popular indicators, and many people assume that because they are so widely documented, they must be the best indicators to use. Many losing traders rely too heavily on these indicators and the very mechanical systems that use them. Similarly, many traders wouldn’t be able to provide a brief overview of how the indicator is constructed, let alone a more detailed explanation of why it should be used. Furthermore, they often won’t consider using any other variables other than those declared as the defaults or the variables that the creator of the indicator stipulated.

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You will also find that profitable traders who do use them will often take the time to learn the actual mathematical construction of the various technical indicators to fully understand what each is displaying. They likely could construct them manually if the need arose. The importance of this is that they fully understand what the indicator is designed to achieve and, therefore, the best way to interpret it and apply it practically. You will also find other traders who have developed simple indicators themselves to assist them with their decision-making.

With time and experience, you will identify your preferred indicators to use as well as how, where, and in what combinations you want to apply them to your trading strategy. Although the temptation can often be to develop a highly complex strategy incorporating a number of different indicators, many traders find it easier and more effective to simplify their approach and strike a balance between accuracy analysis and cost-effective time management with an overall goal of maximizing your long-term profit potential.

The Forex markets are open 24 hours a day, 7 days a week. The markets are always changing, and there are a million different factors that affect trading opportunities. It can be hard and stressful for people to do the trades on their own sometimes. In this situation, a lot of people choose to use a Forex Indicator. You need the right tools and to know how to use them in order to be successful at anything. As a Forex trader, the first thing you need to do is get indicators that help you make better trades. Great traders can’t be found without good indicators. The emotional factor is taken out of Forex Indicator. This means that feelings like greed or fear don’t get in the way of making smart, good choices.

A Forex Indicator also takes away the stress that comes with trading foreign currencies because it can look at all of the variables at once, which is something people can’t do. Forex Indicator makes decisions faster than people do, so you can jump on trading opportunities right away. With the help of forex expert advisors, you can trade more wisely and increase your chances of making money. But it’s also important to choose the right Forex Indicator, one that will keep you safe and make you money.

What Is Forex Indicator?

Before making trades on the markets platform, Forex traders look at different data to figure out how the market is doing and how it is likely to change in the future. With a thorough analysis of the market, traders should be able to use better trading strategies and make more money.

One way to look at market data is with forex indicators. Indicators try to predict how the market will act in the future by looking at past data, such as the price of a currency, how much of it is traded, and how well the market has done. Once traders have this information, they can make better trading decisions, which could lead to higher returns.

The Best Indicators for Forex

People are always looking for the best Forex indicators. While some indicators are more popular than others, there isn’t always one indicator that is better than the rest. Since there are many kinds of data, the best Forex indicators will depend on the kind of trading you want to do.

So, you shouldn’t act too quickly on information you got quickly. You might not get the advice you need from a quick look at an indicator or a summary of data, especially if your trading goals are different from the author’s or aren’t suited to the type of indicator you’ve looked at.

You can figure out which indicators are best for your trading career by figuring out what kind of trading you want to do and then figuring out how different indicators are.

 

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Pros
  • Technical instruments and complex data aren’t just for the likes of experienced traders and professional analysts. In fact, indicators are a way to simplify extremely complex and voluminous data, and anyone can benefit from using Forex indicators.
  • These indicators are part and parcel of the daily routine of forex traders whilst on their account, and forms an integral part in the decision-making process. The more knowledge you have about the market, how it works and what variables affect it, the more informed you will be.
  • By making trading decisions based on past market activity and using previous currency patterns to inform your trading strategy, you could boost your returns and increase your profits.
Cons
  • Strict Money Management
  • You have to Master Yourself First
  • Need Patience
  • Need to control Emotions
  • Must have to maintain Routine Life
  • Requires Monitoring the Market for several hours
  • You have to follow strict rules

How do indicators for Forex work?

There are so many technical indicators that it can be hard to choose just a few to use in a trading strategy. Some traders try out one indicator at a time, while others like to use a mix of indicators. Trend indicators, momentum indicators, and volatility indicators are the three main types of technical indicators that forex traders use.

Volume isn’t always seen as a reliable indicator on the decentralized forex market because there isn’t a lot of data about the volume of exchange trading. However, currency traders will sometimes use approximate volume numbers that they get by counting the tick movements of exchange rates.

Your strategy will be more complicated if you use more than one indicator. Even though there are exceptions, it’s usually best not to use two of the same type of indicator because they’ll just confirm each other’s signals. Instead, you should probably choose indicators that work well together.

Whether you decide to use one indicator or more, you will still have to choose which parameters to use. Some indicators have default settings that you should probably use at first. Some require you to choose a time frame for each bar, such as monthly, daily, weekly, or hourly. You might also have to choose a period, which is the number of bars that an indicator uses to figure out its value.

For instance, you can figure out daily moving average indicators for different time periods, such as the last 200, 100, or 50 days. Your strategy could be based on what happens when two or more moving averages cross over each other, or you could just use one moving average plotted over the exchange rate itself.

Indicators for Forex

Here are the different kinds of forex indicators that currency traders should know.

 

 

Type 1: Signs of a trend

“The trend is your friend” is a well-known saying among traders in the financial markets. Trend indicators can help you figure out which way trends are going and how strong they are so you can follow them. Here are some of the most common trend indicators.

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The average direction change index

The Average Directional Movement Index (ADX) is a useful trend indicator that helps traders figure out how strong the underlying market trend is. It is made up of three parts: the ADX line, the Positive Directional Indicator (+DI), and the Negative Directional Indicator (-DI).

The ADX line is a smoothed moving average (SMMA) of the absolute values of the +DI and -DI components, and its value changes between 0 and 100. The standard period for the ADX is 14 bars, but you can try out different periods.

If the ADX value is between 0 and 25, there is little or no trend. If the ADX is between 25 and 50, the trend is strong. If the ADX is between 50 and 75, the trend is very strong. When the value is between 75 and 100, the trend is very strong.

Moving Averages

Moving averages can also help you figure out which way a trend is going. The easiest way to do this is to plot a simple moving average on a chart and then check if the exchange rate is above or below the moving average. If the exchange rate is higher than its moving average, that means that the pair of currencies is going up.

In the same way, you can compare two moving averages, like a 100-day MA and a 200-day MA. When the 100-day MA is higher than the 200-day MA, the indicators show that the price is going up. You can even trade based on when a moving average crosses over another.

SAR parabolique

It’s easy to use the Parabolic SAR indicator. Technical analysis software shows it as a series of dots above or below each candle or bar on a chart. When the dots are drawn above the exchange rate, it means that the market is getting worse. When the dots show up below the exchange rate, on the other hand, that means the market is strong.

The Parabolic SAR indicator is a great way to find changes in the market. If the dots move from above to below the exchange rate, that means a trend is starting to go up. If the dots move from below to above, that means a trend is starting to go down.

One way to use the Parabolic SAR could be to wait for a change to signal a change in direction. Then, make a trade in the direction shown once four dots in a row show that the move is real.

 

Type 2: Signs of movement

This group of forex indicators measures how quickly exchange rates change. Some people also call them rate of change indicators.

Index of relative strength

The Relative Strength Index, or RSI, can help you figure out if a currency pair has been overbought or oversold. The default calculation period is 14 candles or bars, and the value of the RSI moves between 0 and 100. If the RSI is 70 or higher, it means that the currency pair has been bought too much, while a reading below 30 means that it has been sold too much.

Moving Average Convergence Divergence Oscillator (MACD Oscillator)

Another way to measure momentum is with the Moving Average Convergence Divergence (MACD) oscillator. Sometimes it is shown with two lines (MACD and signal) and a histogram, and sometimes it is shown with just one signal line and a histogram.

“MACD(A,B,C)” is a common notation that means the MACD series is the difference of two exponential moving averages (EMAs) with periods A and B, and the average series is an EMA of the MACD series with period C. Most traders use the default setting of A=12, B=26, and C=9 periods, or MACD (12,26,9).

Using these standard values, the MACD line is found by taking the difference between the 26-day EMA and the 12-day EMA and adding it to 0. The MACD line’s 9-day exponential moving average (EMA) is the signal line, and the difference between the MACD line and the signal line is the MACD histogram.

Traders can look for the MACD line to cross over the signal line when the histogram changes direction. This could be seen as a buy signal if the MACD line crosses above the signal line or a sell signal if the MACD line crosses below the signal line.

The MACD line crossing its horizontal axis is another kind of MACD crossover. This means that the values of the fast and slow EMAs are the same. When the MACD line goes negative, it’s a sign that prices will go down, and when it goes up, it’s a sign that prices will go up.

Traders might also look for a difference between the exchange rate and the MACD to show a change in market momentum that could lead to a reversal. So, if the exchange rate makes a higher high but the MACD makes a lower high, that would be a sign that the trend is about to change in a bearish way. On the other hand, a bullish reversal signal would be if the exchange rate made a lower low but the MACD made a higher low.

Other Signs of Progress

Some traders also use the stochastic oscillator to show how the market is moving and to figure out when prices are too high or too low. Some traders who are more experienced might use the Ichimoku Kinko Hyo system, which is a complicated technical indicator with a graph that can help them figure out how the market is moving. It is made up of support and resistance levels, crossovers, oscillators, and trend indicators.

 

Type 3: Indicators of Volatility


Bollinger Bands

You can use Bollinger Bands to figure out how volatile a currency pair is. Before you can put them on a chart, you need to figure out their standard deviation and moving average. Then, you add two standard deviations to the moving average and subtract two standard deviations from the moving average to make lines above and below the moving average.

Some traders wait for the exchange rate to go above the upper band or below the lower band. This is a sign that they should sell or buy. This strategy works best in a market that goes up and down a lot but usually goes back to its average value.

Average True Range

Average True Range (ATR) is found by taking the exponential moving average (EMA) of the difference between the day’s high and low exchange rates, or between the day’s high and close, or between the day’s close and low exchange rates. The ATR is used to measure how volatile something is, and it can also be used to help manage risks.

Volume indicators

As was mentioned above, it is not as easy to see volume on the decentralized forex market as it is on markets that are mostly exchange-traded. By counting the number of ticks in the exchange rate, you can get an idea of the volume, which can be used to calculate some useful indicators.

Money Flow Chaikin

One example is Chaikin Money Flow (CMF), which is a volume-weighted average of accumulation and distribution over a certain amount of time, usually 21 days. It can move between 1 and -1, but most of the time it moves between 0.5 and -0.5. Values above zero show that there is pressure to buy, while values below zero show that there is pressure to sell.

Distribution Line of Accumulation

The Accumulation Distribution Line is also made with the help of volume data. When this indicator moves in the same direction as the exchange rate, it can help confirm a trend.

 

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FREQUENTLY ASKED QUESTIONS

The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover was reported to be over US $3.98 trillion in April 2010 by the Bank for International Settlements.

MetaTrader 4 indicators are powerful technical analysis tools which can help you to identify market trends and provide evidence for your predictions about future price movements.

Yes it is easy to use. MT4 indicators are a mathematical calculation of the price, time or volume, that will give you either a leading or lagging trade signal. No need to be professional. Everyone can do it. It is completely hands free and the whole process is 100% automated.

Yes it is too easy. Just a few steps and you will be ready to use Forex Indicator. You will also get a guide when you purchase any Forex Indicator, it will help you to install EA. If you still need any help please contact with us.

Yes Forex Indicator can work 24 hours per day from the market opening on Monday to the market closing on Friday.

MT4 is a free trading platform. You can download it from the official web sites of your broker. Here is the list of most popular brokers.

First you need a computer with a minimal hardware configuration and a stable internet connection. Second you need to install Metatrader 4 trading platform. You don’t need to have any additional Forex knowledge.

You can use any broker that offers the Metatrader 4 trading platform. But for Best Result we suggest you to trade with most popular brokers.

You can use Forex Indicator with multiple accounts. There is no restrictions.

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We know that the money is the main question. We know well that many people don’t have much money to get started. Our Indicator is made to be able to trade with a minimum amount of money. The minimum amount depends to your brokerage company too. You can start trading with a small amount as $5.

Every Forex Indicator is unique. Please check the guide before trading. If you don’t understand which one is suitable please contact us.

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Yes you can use. Please Backtest before using it in a real trading. Or use Demo Trade for at least one month with your broker spread and proper balance. Never use in live trading with any pair without demo testing. It is always better to invest time before losing any money.

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