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Technical Indicators
For a technical analyst, indicators are tools that can provide traders with another perspective on the markets. These technical indicators serve as interpreters of market activity, and traders can use this information to their advantage.
In general, technical indicators are derived from mathematical equations of price action, meaning they are driven purely by data. Indicators are useful in many ways, such as identifying market conditions and finding entry or exit points for a trade.
Key Points
- Technical indicators, classified into trending, oscillating, and volume types, provide mathematical analysis of market trends and signals for entering or exiting trades.
- Custom technical indicators, developed independently, can enhance forex trading strategies through unique mathematical computations and are often combined with other indicators to improve analysis.
- Effective use of technical indicators requires understanding their limitations, avoiding ‘analysis paralysis’ from overusing them, and incorporating other technical analysis methods, such as price action.
Types of Technical Indicators
Indicators come in many shapes and sizes but fall into 3 main categories: Trending, Oscillating, and Volume.
1. Trend Indicators
As the name suggests, trend indicators help traders identify market trends. It is usually calculated from the averages of past price action, forming a smooth line. As the saying goes, “the trend is your friend”, traders looking to trade trending markets should have a trend indicator in their arsenal [1].
- Popular Trend Indicator = Moving Average
A moving average is a standard technical analysis tool that calculates the average price fluctuations of an instrument by overlaying a smooth line on the chart.
2. Oscillator Indicators
An oscillator indicator that helps traders gauge trend strength moves in tandem with the market’s highs and lows. The basic idea of an oscillator is the ability to determine “overbought” and “oversold” conditions in the market [2].
- Popular Oscillator Indicator = Relative Strength Index
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change in price movements within a range of 30 (oversold) to 70 (overbought).
3. Volume Indicators
The measure of volume can also be translated into the number of market participants at a given time frame. This information can be valuable for traders who focus on volume. However, this concept only applies to stock trading. In foreign exchange, volume is measured as the number of price changes per bar and is believed to reflect investor activity [3].
- Popular Volume Indicator = Volume Profile
A horizontal line that shows the volume traded at a specific price over a given period, the volume profile indicator has been gaining popularity in recent years.
Custom Technical Indicators
In addition to the well-known indicators, custom indicators can be programmed independently. These custom indicators use proprietary mathematical models to forecast future price changes. Here are a few benchmarks to follow when creating a custom indicator:
- Check the type of indicator
- Determine the components needed
- Determine the set of rules for the indicator to follow
- Back-test and forward-test the indicator
READ MORE: Best Trading Indicators for 2026(Complete Guide)
Best Custom Indicator to Consider
1. Analyst Views – Analyst Views is a custom indicator based on award-winning technical analysis methodology for market direction and key levels. Traders can leave the analysis to a team of experts who provide target levels, pivot points, and alternative targets.
READ MORE: Complete MT5 Guide for Traders and Complete MT4 Guide for Traders
2. Adaptive Candlesticks – Candlestick patterns that illustrate essential changes in supply and demand, the Adaptive Candlesticks scans for 16 trusted candlestick patterns on any chart. A combination of unique technical and quantitative analysis helps traders to make decisions based on the current context.
3. Adaptive Divergence Convergence (ADC) – For short-term trading, the ADC serves as a replacement for the MACD. By providing timely signals and avoiding consolidations, this indicator enables traders to access entry and exit signals, slow & fast price indicators, raw & smooth signal lines, and slow & fast oscillators.
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Best Technical Indicator Combinations
Indicators work best when effectively used with other indicators. In the previous segment, it showcased the importance and variety of indicators available. This segment will review some classic indicator combinations that have stood the test of time. Generally, traders combine a trend indicator with an Oscillator to formulate an indicator-based trading strategy [4].
The examples below are used for educational purposes only. Past performance is not an indication of future results, and any reliance on such is at your own risk.
1. Stochastic (Oscillator) + Moving Average (Trend)
By using an oscillator and trend indicator, traders can make more decisive, confident trades. In figure 4, GBPUSD can be seen trading below the 160-period moving average, indicating a bearish market, while the stochastic oscillator points towards GBPUSD trading in an “Over Bought” market condition, also signaling a sell.
Figure 5 highlights the moving average and stochastic buy-side example. With markets trading above the moving average and stochastic in “Over Sold” territory, both are pointing towards a bullish market.
2. MACD (Oscillator) + Bollinger Bands (Trend)
Figure 6 shows the gold market on the daily chart, with both indicators pointing to a bearish market. MACD flipped from green to red, signaling a sell, while markets trading below the middle Bollinger Band point to a possible bearish market.
Figure 10 shows the USDJPY market going bullish, as indicated by trading above the middle Bollinger Band and the MACD flipping from red to green.
Reliability of Indicators
Although it could seem like indicators are the holy grail of trading, you should not be mistaken. A common mistake traders using indicators would make is applying too many indicators to the chart. This often leads to “analysis paralysis”. Too much information is not necessarily a good thing, so remember to keep your trading strategy focused.
Understanding that no indicator is perfect will help reduce overreliance on them. Many traders base almost all trading decisions on these indicators. Remember that there are other forms of technical analysis, such as price action, that can be just as effective as indicators.
Want to find out which combination of indicators works the best? Try practicing it through your own Forex Demo Account.
References
- “Moving Average (MA): Purpose, Uses, Formula, and Examples – Investopedia”. https://www.investopedia.com/terms/m/movingaverage.asp. Accessed 21 Sept 2022.
- “Indicators for Overbought and Oversold Stocks – Investopedia”. https://www.investopedia.com/ask/answers/121214/what-are-best-indicators-identify-overbought-and-oversold-stocks.asp. Accessed 21 Sept 2022.
- “What are Volume Indicators (& How to Use Them) – BlueberryMarkets”. https://blueberrymarkets.com/learn/intermediate/volume-indicators/. Accessed 21 Sept 2022.
- “6 Killer Combinations for Trading Strategies – FX Leaders”. https://www.fxleaders.com/learn-forex/course/ch9-6-killer-combinations-for-trading-strategies/. Accessed 21 Sept 2022.
This information is intended for educational purposes and constitues general information only. The company does not take into account the specific investment objectives, needs or financial situation of any person, makes no representation and assumes no liability to the accuracy, completeness, suitability and timeliness of the published content. The “technical indicators” described above are not ranked in any order and not intended as, and shall not be understood or constructed as, a recommendation, or basis to make any specific investment decision. Reliance on such information is solely at your own risk and we cannot be held liable for any outcome of decisions resulting directly or indrectly from such reliance. Past performance is not an indication of future results.
