Here we will look at some of the best Forex Trading indicators and how you can combine them into a simple robust Forex trading strategy for long term gains. No single Forex trading indicator works all the time by itself and the way you combine them is essential. Many traders make the mistake of thinking the more indicators they combine the better – Wrong! If you do this the system has too many elements to break. You only need a few and your Forex trading system will be simple and robust in the face of ever changing prices.
Let’s build our Forex trading system and look at some of the best Forex trading indicators to help you build a trend following Forex trading system.
First Identify the Trend
This is obvious by looking at a bar chart but you also want to use moving averages as well. Simple moving averages are great in terms of smoothing out the fluctuations. Two great periods to use are first, the 40 day MA to identify the long term trend. Secondly, use the 20 day MA to buy and sell back to in a strong trend. You will find this moving average is excellent for getting in on a trend in motion, with optimium risk / reward.
Spotting the Set Ups
We don’t have time to cover this in detail here but there are a couple of points that are the key to maximizing profits. Firstly, be patient and only trade high odds set ups and secondly, make sure you trade breaks to new highs and lows. All the big trends start and continue from them so you need to trade them.
Bollinger Bands – Check Volatility and Standard Deviation
Ask most traders what standard deviation of price is and you will probably get a blank look, but an understanding of the standard deviation of price and volatility is something that all forex traders need to know about. If you don’t, make it part of your forex education and learn about Bollinger Bands. Bollinger Bands are not used for market timing, but to give you an all around view of volatility and when you understand this concept, Bollinger Bands can help you in 3 ways: They can alert you to potential big moves, help set targets and spot market value and entry levels.
Best Forex Trading Indicators for Confirming
When you spot a potential opportunity, you need to confirm the move and make sure price momentum is going the way you wish to trade. There are plenty of momentum indicators, but for the last 25 years I have found the following two the best. They are easy to learn and apply. Let’s take a quick look at them.
The Relative Strength Index (RSI)
A great leading indicator to time your trading signals with. If the RSI supports your view of the market you can use it in strong trends, or when it diverges from the prevailing trend (from overbought or oversold) to enter trades against the prevailing trend.
The Stochastic Indicator
The best Forex trading indicator of all for better market timing and when combined with the RSI you have a dynamite combination. The stochastic is a simple indicator but is the ultimate timing tool for timing trading signals in my view. If you use stochastic crossovers to confirm your move, you will get the odds on your side. It’s also very effective for timing contrary positions. A stochastic cross, from overbought or oversold levels, against the trend is a highly effective way of getting in on the big contrary trades.
Simple and Effective
There are other great indicators around such as the ADX indicator, MACD and many others, but as a blend the above 4 indicators with a bar chart are my best forex trading indicators for profit and they have served me well over the last 25 years. The indicators are easy to learn and apply and if blended correctly can add a new dimension to your forex trading strategy.
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