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Last updated on May 22nd, 2024
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The 12 Best Indicators for Forex Trading

A comprehensive guide to indicators for forex and CFD traders. Find the right indicator for you.

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In this article

The MarketMates promise

At MarketMates, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

In this article

Indicators are graphical or mathematical tools used by traders to analyse price data and identify potential trends or patterns in financial markets.

It doesn’t matter what asset you are looking at, chart indicators remain the same, no matter what financial asset you choose to trade.

That means you can use the same indicator whether you’re trading gold, or plotting the price movement of one currency against another.

In this lesson we look at 12 of the best indicators for forex trading, and explain how best to use them.

What are the best indicators for forex trading

Indicators are plotted either on top of price candlesticks, or directly underneath them, and they assist traders to make informed decisions.

These decisions can include:

  • trend direction
  • breakout points
  • support levels
  • resistance levels
  • entry and exit points

They can also help traders determine their stop loss level, and assist with risk management decisions.

Learning to understand indicators is a very important skill to master in order to become a good trader.

Technical analysis is a broad subject

Some professional traders make it their life’s work to study and develop new, more accurate indicators.

You can even get a degree in technical analysis (reading charts) at university!

The more you understand what charts are telling you, the more proficient a trader you will eventually become.

When teaching beginners how to trade, I found that some traders got caught up in the mathematical aspect of indicators.

It is not necessary to understand the maths behind each indicator in order to learn to use indicators to improve your trading.

You just need to recognise what the indicator is telling you, not necessarily understand how the indicator is calculated.

12 best forex indicators

Here are 12 of the best forex indicators:

  • Moving averages
  • MACD
  • Bollinger Bands
  • RSI
  • ADI
  • ATR
  • Supertrend
  • Parabolic SAR
  • Donchian Channels
  • Ichimoku Clouds
  • Stochastic Oscillator
  • Williams % Range

1. Moving averages

A moving average (MA) is a statistical calculation used to smooth out fluctuations in the price of an asset over a specified time period.

It is called an average because it shows the average price for that asset for a particular time period.

It is moving because it follows price action.

There are two relatives of the simple moving average (SMA):

  • a weighted moving average (WMA)
  • an exponential moving average (EMA)

These last two use an enhanced mathematical formula to produce indicators that are more sensitive to price trend.

Moving averages are used to:

  • identify trends
  • assess the direction of price movement
  • filter out short-term ‘noise’ in the market
  • set stop-loss levels

During my CFD day trading, I used moving average crossovers extensively to give me entry signals for my trades. I found them accurate, reliable and easy to use.

For more information on moving averages, see the lesson in this series dedicated to this subject, and how to use MAs for trade entry.

This is an example of a simple 5-day moving average and a 20-day moving average on a candlestick chart. The grey 5-day MA hugs price action closer than the red 20-day MA line does.

Moving averages

2. Moving Average Convergence Divergence (MACD)

This indicator compares two exponential moving averages (EMAs) of different time scales, and plots their differences.

(If you want to know how to pronounce it, some traders call it the Mac-D, while others call it the M-A-C-D.)

An Exponential Moving Average (EMA) is a type of moving average that gives more weight to recent price data, compared to older data points.

In other words, it emphasises recent price movements more heavily than past movements.

The MACD indicator consists of a MACD indicator line, a signal line, and a histogram, which is a series of bars that sit either above or below the zero line.

This is what the MACD indicator looks like:

MACD indicator

In this diagram, the blue line is the EMA line, and the yellow line is the signal line.

Understanding the components

  • the MACD line is calculated by subtracting the longer-term Exponential Moving Average (EMA) from the shorter-term EMA.
  • the signal line is typically a 9-period EMA of the MACD line.
  • the histogram represents the difference between the MACD line and the signal line.

It is one of the most popular momentum indicators, as it combines trend following (ie. price trend action) with momentum (ie. how strong the movement is.)

Divergences (ie. moving apart) between the MACD indicator and the signal line can indicate potential trend reversals or continuations.

Traders can look for signal line crosses, centre line crossovers, and divergences to generate signals.

Think of an MACD indicator as a visual shortcut, showing you what the gap difference between different EMAs is indicating.

How do you use the MACD?

The standard setting for MACD is the difference between the 12-period and 26-period EMAs.

If you are a short-term day-trader, you may wish to set the MACD to a more sensitive setting, such as 5-35, rather than 12-26.

Signal line crosses:

  • a bullish signal occurs when the MACD line crosses above the signal line, indicating potential upward momentum.
  • conversely, a bearish signal occurs when the MACD line crosses below the signal line, signalling potential downward momentum.

Divergences

Divergence between the MACD line and the price chart can indicate a potential trend reversal.

  • bullish divergence occurs when the price makes lower lows, but the MACD line forms higher lows, suggesting weakening bearish momentum.
  • conversely, bearish divergence occurs when the price makes higher highs, but the MACD line forms lower highs, indicating weakening bullish momentum.

The Histogram:

The histogram provides visual confirmation of the relationship between the MACD line and the signal line.

  • positive histogram bars indicate bullish momentum
  • negative bars indicate bearish momentum

In my experience it’s essential to confirm MACD signals with price action and other indicators to reduce false signals.

3. Bollinger Bands

This is a very important indicator which we use extensively the Advanced Course for Forex Traders.

You can get FREE access to the course here

Bollinger Bands consist of three lines: the middle or indicator line, which is typically a simple moving average (SMA), and two outer bands, which are calculated based on standard deviations from the middle line.

Learning Point: Standard Deviation

A deviation is a statistical measure that quantifies the amount of variation in a set of data points. Therefore, standard deviation measures how ‘spread out’ the values in a dataset are from the mean (average) value.

In simple terms, the greater the deviation the more stretched the price is, and the more likely it will snap back to its average. 

  • The upper band is usually set at two standard deviations above the middle line
  • The lower band is set at two standard deviations below the middle line.

Wider bands indicate higher volatility in price action, and narrower bands indicate lower volatility.

Breaches of the bands by the price action (ie. candlesticks going above or below the bands) can suggest potential trend breakouts.

Bollinger Bands

How to use Bollinger Bands

Volatility assessment:

  • when the bands expand, it indicates increased volatility in the market.
  • conversely, when the bands contract, it suggests decreased volatility.

Traders often look for periods of contraction followed by expansion, as this can signal potential breakouts or significant price movements.

Identifying overbought and oversold conditions:

  • when the price touches or exceeds the upper band, it may suggest that the asset is overbought, and a reversal or pullback could occur.
  • conversely, when the price touches or falls below the lower band, it may indicate that the asset is oversold, and a reversal to the upside could be imminent.

Spotting trend reversals:

  • Bollinger Bands can help identify potential trend reversals (for example, when the price pierces or closes outside of the bands.)
  • a breakout above the upper band could signal the start of an uptrend, while a breakout below the lower band could indicate the beginning of a downtrend.
Bollinger bands with price breakout

See how the price has broken out above the top Bollinger Band in this example?

The breakout signals overbought conditions, which is confirmed by the next long red candlestick, signalling a trend reversal.

4. Relative Strength Index (RSI)

The RSI is a momentum oscillator that measures the speed and change of price movements.

It oscillates between 0 and 100, and is typically used to identify overbought and oversold conditions.

This is what the RSI indicator looks like:

RSI indicator

As you can see, there is a centre line (the dotted line) which is at the 50 position. The purple line is the indicator, and the yellow line is a ‘smoothed out’ version of the purple line.

Traders often look for divergence between price and RSI to spot potential trend reversals.

Learning Point: Divergence

Divergence means when the price makes a new high or low, but the RSI fails to confirm, which may signal a potential trend reversal.

The side scale of this indicator goes from 0 at the bottom, to 100 at the top, with the dotted line set at the 50 mark to show the middle.

How to use the RSI indicator

To detect overbought or oversold conditions, look for the value of the purple line:

  • an RSI above 70 indicates potential overbought conditions, indicating that the asset may be due for a correction or reversal to the downside
  • an RSI below 30 indicates oversold conditions, suggesting that the asset may be undervalued and due for a bounce or reversal to the upside

In our example above, can you see when the RSI indicator goes above 70 (coloured green) it shows price action entering overbought territory.

5. Average Directional Index (ADX)

This indicator identifies the strength of the current trend, regardless of its direction. Therefore, it can be regarded as a trend momentum indicator.

It typically appears as a single line on a chart, oscillating between 0 and 100.

A high ADX value indicates a strong trend, while a low value suggests a volatile or choppy market without a clear trend.

It helps traders identify whether a market is trending or ranging.

The ADX is calculated based on the difference between two directional indicators, known as the Positive Directional Index (+DI) and the Negative Directional Index (-DI).

Some charting programs show both these positive and negative lines, with the ADX indicator as a signal line.

However, other programs simply show the signal line.

Here is what it looks like with just the signal line. 

ADX line

The ADX signal line appears as a single red line below the price candlesticks.

If you wish to see the +DI and –DI lines, in addition to the signal line, change your indicator to view the Directional Movement Index to see all three lines together.

The formula for ADX involves smoothing these directional indicators over a specified period (14 days) to reduce noise and provide a clearer indication of trend strength.

How to use the ADX indicator

To identify trend strength:

Use ADX to assess the strength of a trend.

A rising ADX indicates increasing trend strength, while a falling ADX suggests weakening momentum.

  • look for ADX values above 25 to confirm a developing trend
  • look for values above 40 to indicate a strong trend
  • if the value is below 25 do not trade, as no clear price direction is discernible

6. Average True Range (ATR)

The Average True Range (ATR) indicator measures market volatility by calculating the average range between high and low prices over a specified time period.

It is used to indicate the average range of price movement of an asset in a set period of time.

The typical range it calculates average price range for is 14 days, but you can specify this number according to your personal requirements.

If you are day-trading, I suggest you set the range to 7-day to make it more sensitive to price action in the past week.

The ATR indicator is a single line which tells you how many units (dollars, cents) the price moves on average per your specified period.

This is what ATR looks like:

ATR average true range

The red line below candlestick price action is the ATR indicator.

Choosing smoothing options

As well as changing the time frame for the ATR, it’s also possible to choose which method of smoothing is used in this indicator.

Your choices include:

  • Simple Moving Average (SMA):

The Simple Moving Average is the most basic form of moving average calculation.

It calculates the average of a set of data points over a specified period by adding up the values and dividing by the number of periods.

SMA treats all data points equally, giving each one the same weight in the calculation.

  • Exponential Moving Average (EMA):

The Exponential Moving Average gives more weight to recent data points compared to older ones.

It calculates the average by applying a smoothing factor to the previous EMA value and adding a fraction of the difference between the current price and the previous EMA value.

EMA reacts more quickly to recent price changes, making it more responsive to current market conditions compared to SMA.

  • Weighted Moving Average (WMA):

The Weighted Moving Average assigns different weights to each data point in the calculation.

It gives more weight to recent data points, and less weight to older ones, allowing it to react quickly to price changes.

WMA is similar to EMA in its responsiveness to recent price movements, but differs in the calculation method.

  • Running Moving Average (RMA):

The Running Moving Average calculates the average of all data points up to the current point in time.

It updates the average with each new data point, by taking the sum of all previous data points and dividing by the number of periods.

RMA provides a smoothed average of the entire dataset, with each new data point influencing the average slightly.

Choosing the right smoothing option:

These are my experiences with the different price smoothing options:

  • SMA: Useful for identifying longer-term trends and smoothing out price fluctuations.
  • EMA: Preferred for short-term trading and reacting quickly to changes in market sentiment.
  • WMA: Offers a compromise between SMA and EMA, providing responsiveness to recent price movements while still considering older data.
  • RMA: Provides a comprehensive view of the overall trend, but may lag behind in reacting to recent price changes.

My advice is, if you are a beginner trader, don’t get too hung up on which smoothing method to use.

If you are day-trading, stick to 7-day EMA smoothing until you are further down the road in your technical analysis journey.

7. Supertrend

The Supertrend indicator is a popular trend-following tool used to identify the direction of the current trend, and potential entry or exit points.

The Supertrend indicator is based on a combination of two components:

  • the Average True Range (ATR)
  • plus a multiplier factor

It plots a line above or below the price chart, representing potential support or resistance levels based on recent price volatility.

The Supertrend indicator uses the Average True Range (ATR) to measure the volatility of the market.

(As described above, ATR is calculated based on the average of true price ranges (high-low) over a specified period, typically 14 periods.)

This is what the Supertrend looks like with above or below price action:

Supertrend indicator

Multiplier factor

The multiplier factor is a user-defined parameter that determines the distance of the Supertrend line from the price.

The most common multiplier values range from 2 to 3, where higher values result in wider bands, and lower values in narrower bands.

How to use the Supertrend indicator

The Supertrend indicator can be used for multiple purposes:

  • to identify trend direction
  • to generate entry signals
  • to generate exit signals
  • to determine the position for trailing stop-loss positions

Trend direction is indicated by the position of price action in relation to the indicator.

Entry signals are:

  • enter long positions when the price crosses above the Supertrend line, indicating a potential uptrend
  • enter short positions when the price crosses below the Supertrend line, signalling a potential downtrend

Exit signals are indicated when the trend changes direction.

  • exit long positions when the price closes below the Supertrend line, suggesting a potential reversal or end of the uptrend
  • exit short positions when the price closes above the Supertrend line, indicating a potential reversal or end of the downtrend

Use it as a trailing stop loss indicator

Traders can use the Supertrend line as a trailing stop-loss level, to protect profits and ride trends.

As the price moves in the direction of the trend, adjust your stop-loss level to lock in your gains and minimise loss based on the Supertrend line.

You can adjust the settings of the Supertrend to make it work well for capturing short sharp moves.

Do this by changing the ATR multiplier to 1 (from its default position of 3.)

Here is an example of the multiplier value set at its default 3 position. Note the distance between the indicator lines and price action.

Supertrend indicator set to 3

Now here is the same price action, with the multiplier value set to 1, rather than 3. See how the indicator is closer to the candlesticks?

Supertrend Indicator set to 1

We have found that changing the multiplier from 3 to 1 works well to capture short, sharp price movements.

Be aware that the Supertrend indicator works best in trending markets, and may produce false signals during sideways or choppy market conditions.

8. Parabolic SAR

The Parabolic SAR (Stop and Reverse) is a technical indicator primarily used to identify potential trend reversals and provide trailing stop-loss levels.

It is popular with traders for its simplicity, and its effectiveness in trending markets.

However, in my experience, it does not work well in flat or consolidating market conditions.

The Parabolic SAR is represented by a series of dots placed above or below the price chart.

The position of these dots changes over time, indicating potential stop-loss levels or trend reversal points.

This is what it looks like:

Parabolic SAR

As you can see from the example above:

  • when the dots are below the price action, they act as support levels
  • when they are above the price action, they act as resistance levels

How to use the Parabolic SAR indicator

Confirming Trend Direction

The direction of the Parabolic SAR dots can confirm the direction of the trend.

  • when the dots are below the price, it suggests an uptrend
  • when the dots are above the price, it indicates a downtrend

Identifying Trend Reversals

Switching position from above to below the priceline indicates a trend reversals

  • when the Parabolic SAR switches from being above the price to below it, it indicates a potential bullish reversal
  • conversely, when it switches from below the price to above it, it suggests a potential bearish reversal

Setting Trailing Stop-Loss Levels

You can use the Parabolic SAR as a trailing stop-loss tool, to protect profits and manage your risk.

As the price moves in the direction of the trend, the SAR dots follow, providing updated stop-loss levels.

Adjusting Parameters:

The SAR will adjust automatically depending on the chart timeframe you’re looking at, as long as the timeframe setting is set to ‘chart.’

You can adjust the Acceleration Factor (AF) to make the Parabolic SAR more or less sensitive to price changes.

  • a smaller AF value results in a slower-moving SAR
  • a larger AF value leads to a faster-moving SAR

For day-traders and forex traders, I suggest you leave the defaults at the standard AF values which are Start: .02 and Increment .02.

To filter out whipsaws (false signals), combine the Parabolic SAR with other technical indicators.

Personally, I would not use the Parabolic SAR on its own as an indicator, as I do not believe the signals it provides are accurate enough for my requirements as a day-trader.

9. Donchian Channels

Donchian Channels, also known as Donchian Bands, are a technical analysis tool used to identify potential breakouts and measure market volatility.

This indicator consists of three lines: an upper channel line, a lower channel line, and a middle channel line.

  • Upper channel Line: This line represents the highest high over a specified period, typically the past (n) number of trading days.
  • Lower channel line: Conversely, this line represents the lowest low over the same specified period.
  • Middle channel line: Some traders also include a middle line, which is the average of the upper and lower channel lines.

This indicator is typically used to measure volatility and assist with trend identification and breakout entry points.

This is what it looks like:

Donchian channels

It looks the same as Bollinger Bands at first glance, so what is the difference between these two indicators?

Donchian Channels:

Donchian Channels are based on the highest high and lowest low prices over a specified period. The upper channel line is derived from the highest high, while the lower channel line is derived from the lowest low.

Bollinger Bands:

Bollinger Bands consist of a simple moving average (SMA) in the middle, along with upper and lower bands that are calculated based on standard deviations of the price from the SMA.

Settings

It’s possible to alter the length over which the high and low prices are calculated. The default is 20 periods.

Day-traders wishing to increase the sensitivity of the channels may wish to decrease this default to 14.

The Offset default is 0. This offset moves the Donchian Channels either forwards or backwards relative to the current market.

It’s best to leave the default value at 0.

How to use Donchian Channels

Identifying Breakouts

Donchian Channels are primarily used to identify potential breakouts.

A breakout occurs when the price breaks above the upper channel line (bullish breakout) or below the lower channel line (bearish breakout).

  • enter long positions when there’s a bullish breakout above the upper channel line
  • enter short positions when there’s a bearish breakout below the lower channel line

Trend Confirmation

The direction of the breakout from the Donchian Channels can confirm the direction of the trend.

  • a bullish breakout suggests an uptrend
  • a bearish breakout indicates a downtrend

Measuring Volatility

The width of the Donchian Channels can provide insight into market volatility.

  • wider channels indicate higher volatility
  • narrower channels suggest lower volatility

Setting stop-loss and take-profit levels

Traders often use the Donchian Channels to set stop-loss and take-profit levels.

  • for long positions, the lower channel line can act as a trailing stop-loss level
  • for short positions, the upper channel line can serve as a trailing stop-loss level
  • some traders consider taking profits when the price approaches the opposite channel line

Trend Confirmation

The direction of the breakout from the Donchian Channels can confirm the direction of the trend.

  • a bullish breakout suggests an uptrend
  • a bearish breakout indicates a downtrend

10. Ichimoku Clouds

The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a powerful technical analysis tool developed by Japanese journalist Goichi Hosoda in the late 1930s.

It provides traders with a comprehensive view of potential support and resistance levels, trend direction, and momentum in the market.

The Ichimoku Cloud consists of several components, each offering a different insight into price action.

The Kumo (Cloud)

The central feature of the Ichimoku Cloud is the Kumo, which represents the ‘cloud’ or ‘span’ in Japanese.

It consists of two lines:

  • the Senkou Span A (Leading Span A)
  • the Senkou Span B (Leading Span B)

The area between Span A and Span B forms the cloud, which can help identify potential support and resistance levels.

This is what the cloud looks like when the other lines have been removed from the chart:

Ichimoku Clouds

The colour of the cloud changes based on the relationship between Span A and Span B.

  • when Span A is above Span B, the cloud is typically green, indicating bullish sentiment.
  • conversely, when Span A is below Span B, the cloud is red, signalling bearish sentiment

Tenkan-sen (Conversion Line)

The Tenkan-sen, also known as the Conversion Line, is calculated as the average of the highest high and the lowest low over the past nine periods.

It measures short-term momentum and can act as a support or resistance level.

Kijun-sen (Base Line)

The Kijun-sen, or Base Line, is calculated as the average of the highest high and the lowest low over the past 26 periods.

It represents medium-term momentum and can also serve as a support or resistance level.

Chikou Span (Lagging Span)

The Chikou Span, or Lagging Span, is the current closing price plotted 26 periods in the past.

It helps traders identify potential trend reversals by comparing current price action to past price action.

How to use the Ichimoku Cloud

Trend identification

  • the direction of the cloud (green for bullish and red for bearish) can help traders identify the overall trend
  • in an uptrend, prices tend to stay above the cloud, while in a downtrend, prices typically remain below the cloud

Support and resistance levels

  • the Kumo (cloud) acts as dynamic support and resistance levels.
  • look for price bounces off the cloud or breakouts from the cloud to identify potential trading opportunities

Crosses and crossovers

Crosses between the conversion and base lines can signal changes in short-term momentum.

  • a bullish crossover (conversion line crossing above base line) suggests bullish sentiment
  • a bearish crossover (conversion line crossing below base line) indicates bearish sentiment

Confirmation signals

You can use the lagging span to confirm trading signals.

For example, if the lagging span crosses above or below the price, it may confirm a bullish or bearish trend, respectively.

Filtering signals

Some traders use the relationship between the price and the cloud to filter out false signals.

For example, they may only take long trades when the price is above the cloud in an uptrend, and vice versa

Momentum Confirmation

The slope and angle of the cloud can provide insight into the strength of the trend.

  • a steeply sloping cloud indicates strong momentum, while a flat or sideways cloud suggests weakening momentum.

To make the Ichimoku indicator easier to understand, it’s a good idea to turn off the span indicator lines and just leave the cloud visible.

This can be done by going into your chart program settings, and toggling on and off lagging spans or the base or conversion lines as you choose, to make the indicator easier to read.

11. Stochastic Oscillator

The Stochastic Oscillator is a popular momentum indicator used to identify potential trend reversals and overbought or oversold conditions in the market.

It compares the current closing price of an asset, to its price range over a specified period, typically 14 periods.

There are several different compenents of the Stochastic Oscillator.

%K Line

The %K line represents the current price relative to the highest high and lowest low over a specified period, usually 14 periods.

It measures the momentum of the price.

%D Line (Signal Line)

The %D line, also known as the signal line, is a moving average of the %K line over a specified period, typically three periods.

It smooths out the fluctuations in the %K line and provides additional confirmation signals.

This is what it looks like:

Stochastic indicator

In this case, the %K line is the blue line, and the %D line is the yellow one.

How to use the Stochastic Oscillator

Overbought and Oversold Conditions

The Stochastic Oscillator is used to identify overbought and oversold conditions in the market.

  • readings above 80% are considered overbought, suggesting that the asset may be due for a pullback
  • readings below 20% are considered oversold, indicating that the asset may be undervalued and due for a bounce

Crosses and divergences

Pay close attention to crosses and divergences between the %K and %D lines.

  • a bullish crossover occurs when the %K line crosses above the %D line, suggesting upward momentum
  • a bearish crossover occurs when the %K line crosses below the %D line, indicating downward momentum

Divergences occur when the price makes a higher high or lower low, but the Stochastic Oscillator fails to confirm it.

  • Bullish divergence occurs when the price makes a lower low, but the Stochastic Oscillator forms a higher low.
  • Bearish divergence occurs when the price makes a higher high, but the Stochastic Oscillator forms a lower high.

Divergences may signal potential trend reversals.

Trend Confirmation

Some traders use the Stochastic Oscillator to confirm the direction of the trend.

  • In an uptrend, they may only take long positions when the Stochastic Oscillator is oversold and forms a bullish crossover
  • In a downtrend, they may only take short positions when the Stochastic Oscillator is overbought and forms a bearish crossover

Multiple timeframe analysis

Traders often use the Stochastic Oscillator in conjunction with other technical indicators and multiple timeframe analysis to filter out false signals and increase accuracy.

  • For example, use a longer timeframe to identify the overall trend direction, and a shorter timeframe for entry and exit signals.
  • In my experience, the Stochastic Oscillator works best in trending markets, and may produce false signals in ranging or choppy markets.

12. Williams % Range

The Williams %R, also known as Williams Percent Range or simply %R, is a momentum oscillator used to identify overbought and oversold conditions in the market and potential trend reversals.

It measures the current closing price relative to the high-low range over a specified period, typically 14 periods.

This is what it looks like:

Williams % Range

As you can see, it consists of an indicator line (the purple line) and two threshold levels (the dotted lines).

  • top level (top dotted line) is -20%)
  • bottom level (bottom dotted line) is -80%

How to use Williams %R

Identifying overbought and oversold conditions

Williams %R is primarily used to identify overbought and oversold conditions in the market.

  • readings above -20 indicate that the asset is overbought and may be due for a pullback
  • readings below -80 suggest that the asset is oversold and may be due for a bounce

Divergence and confirmation signals

Traders pay attention to divergences between price action and Williams %R readings.

  • bullish divergence occurs when the price makes a lower low, but Williams %R forms a higher low. This may signal a potential bullish reversal.
  • bearish divergence occurs when the price makes a higher high, but Williams %R forms a lower high, indicating a potential bearish reversal

Confirmation signals occur when Williams %R crosses above or below certain threshold levels (-20 for overbought and -80 for oversold).

These crosses may confirm the direction of the trend and potential reversal points.

Trend Confirmation

Some traders use Williams %R to confirm the direction of the trend.

  • in an uptrend, they may only take long positions when Williams %R is oversold and forms a bullish crossover above –80.
  • in a downtrend, they may only take short positions when Williams %R is overbought and forms a bearish crossover below -20.

Williams %R works best in trending markets and may produce false signals in ranging or choppy markets.

Which indicator should I use?

Having the right tools at your disposal when trading can make all the difference between success and failure.

Among the myriad of technical indicators available, some stand out as particularly valuable for forex traders.

Here, we’ve compiled a summary of the 12 best indicators that can help you navigate the forex markets with greater confidence and effectiveness.

The answer ultimately depends on your trading style, preferences, and objectives.

Some traders may prefer trend-following indicators like moving averages and MACD, while others may favour oscillators like RSI and Stochastic Oscillator for identifying overbought and oversold conditions.

It’s essential to experiment with different indicators, understand their strengths and limitations, and find the ones that best align with your trading strategy and goals.

Personally, when I’m day trading CFDs, I like to keep my chart views simple. I use:

  • a five-day SMA and a 14-day EMA over price action
  • Below my price action chart, I usually display the RSI and volume if I am trading stock CFDs
  • I may refer to the Bollinger Bands on another chart tab if I feel like confirmation of overbought or oversold conditions.

My advice is when first starting to trade, don’t get too hung up on the technicalities of how indicators are calculated.

I’d suggest you keep the standard indicator settings if you are just starting out on your trading journey, and stick to a maximum of three indicators to show you basic:

  • trend strength and direction
  • overbought or oversold conditions
  • stop-loss positions

Have fun learning all about the indicators that are available to assist you trading!

Till next time,

Cate

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Cate Cook

Cate Cook

Cate is a journalist by profession who started trading shares in 2008, after which she became a fulltime CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to get the latest articles from Cate.
Cate Cook

Cate Cook

Cate is a journalist by profession who started trading shares in 2008, after which she became a fulltime CFD day trader for more than 10 years. She now combines her passions for writing and trading at MarketMates. Join the blog to get the latest articles from Cate.

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General Advice Warning: From time to time, you may receive general non-binding advice from us. This information is intended to be general and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation, and needs. MarketMates is not liable for or held responsible for any loss, financial or otherwise in relation to information received from MarketMates.

© 2024 – MarketMates.
All rights reserved | Privacy Policy | Risk Disclosure

General Advice Warning: From time to time, you may receive general non-binding advice from us. This information is intended to be general and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation, and needs. MarketMates is not liable for or held responsible for any loss, financial or otherwise in relation to information received from MarketMates.

© 2024 – MarketMates.
All rights reserved | Privacy Policy | Risk Disclosure

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