The best forex indicators

I would like to make a decent review of the classic and basic forex indicators that matter the most.

In forex ivestment world there are, literally, hundreds of various forex indicators and tools, from simple to the complex ones. Being in forex over 4 years now, I can say, that most of them, no matter how glorified, might as well be avoided (that is just my humble opinion). No doubt, they represent the past, something, that has already happened, and is supposed to happen in the future, thus repeating the past.

That is the essence of every forex indicator or tool - to predict the future with reference to the past price behavior. In other words, if the price moves in a certain way, most likely it will move again in the same manner.

However, very often the signals of these forex tools are either confusing, misleading or lagging in time perspective. The best features that describe a good and reliable forex indicator are the precision and time. The higher the overall number of accurate and successful signals of an indicator - the better. The similar description is applied considering the time - the earlier the signal - the better. Of course, there will be a number of inaccurate and late signals, but the percentage of those must be as small as possible.

Over the years I have been able to identify forex indicators that give you the most accurate and early forex signals of the trade entry.

Those forex indicators could be roughly classified to simple moving averages and exponential moving averages.

Simple moving average is calculated by adding the closing price of a currency pair for a certain number of time periods and dividing the total number by the number of time periods. To put it shortly - it is the price of a currency pair over a certain period of time.

Exponential moving average is almost the same, except more weight is given to the latest time data, thus it should be used in smaller time patterns. Overall, moving average indicator filters the data and gives you a clear view of the present market trend.

Using the moving averages you can determine a price direction and location, thus a signal when to buy or sell. For example, the price above moving average is a signal to buy, below moving average - to sell. I usually use 200, 100, 50 day simple moving averages, 26 day Exponential moving average and 12 day exponential moving averages. The bigger the number of day length the greater the trend and smaller possibility of trend change. Long term investors usually use 200 or 100 moving averages, that don't change quickly. Short term traders use small 10 or 20 days, mostly exponential moving averages. The intersection of small time period and long time period moving averages usually signals of the trend change. Here is an example.

MACD - moving average convergence divergence can be described as a forex indicator showing a relation between two moving averages of prices. It is calculated by subtracting the exponential moving average of 26 days (EMA) from 12 days EMA. It also has a signal line - the 9 day EMA, it usually triggers the buy or sell signals. The signals for buy or sell could be:

Crossovers - MACD falls below the signal line - it's time to sell, the rise above the signal line - time to buy.

Divergence - When the movement of the currency pair does not correlate with the movement of the MACD - signal of the current trend change.

RSI or relative strength index - indicates a technical momentum that compares the overall quantity of recent profits to recent losses and determines overbought and oversold conditions of the currency.
RSI mostly ranges from 0 to 100, though sometimes it is set to range of 0 - 70. The currency is supposed to be overbought when the RSI line reaches the 70 or more level, thus signaling for sell and oversold, when the line reaches the 30 or less. It works good in ranging market movements, but it could be producing false signals in the volatile and intense trend conditions, so be careful when using this kind of forex indicators.

Chart technical patterns. Those technical forex indicators are best used when there is no news release, because it then is often disrupted.
The most commonly used are:

1. Head and shoulders. A chart pattern, where a currency price rises to a peak, declines, then rises above a former peak and declines again. Finally, it rises to the level of the first peak and declines. In this way we have the so called head and shoulders figure. When the price falls lower of the neck line price (the line can be drawn from the two lowest valleys or points of the formation), we usually have a sell signal. On the other hand, the same principle applies to the inverted head and shoulders, when the price goes up and it's time to buy.

2. Double top or double bottom. The price rises to a peak, declines, then rises again to the same almost exact level - and finally declines. The entry signal (short) is the second peak. The same principal, only in the inverse manner is applied the double bottom. This one is best used in a flat price movement.

3. 123 - very simple, classic and very strong trend movement signal. For an entry signal, let's say long (buy) - the price rises to a peak, declines, does not reach the last low level and then rises again, this time above the recent high. I like this one. Buy trade entry is usually placed above the last high, with stop loss below the last low,
There are also W, M, flag formations, those I might review in another article, I just don't want to flood you with the information.

4. Trend lines and channels. Those are also chart formations; you just have to identify it yourself. They are used in the upward or downward trend movement by drawing lines from the first low to the last low of the last time period. The opposite is drawing the line from the first high peak to the last hight peak of the last time period. Look at the picture, I believe it explains everything. Used only in trend conditions for identifying entry and exit signals.

5. Support - resistance levels. This is a term used by technical traders when referring to specific price levels that have stopped the price movement in a certain direction and made it reverse. Best used in the flat, ranging market, also used for price breakout strategy. Usually, when a support or a floor is broken, and the price falls lower than two or three or even more bottoms that have formed in a period of time - this is a strong sell signal. After the floor has been broken and the price goes to new lows, the floor or support usually becomes the resistance or the ceiling. The same can be said about breaking the resistance and moving upwards.

There are also Fibonacci numbers, Elliot Waves and many others, which I might cover in the future. In the meanwhile, afore mentioned forex indicators are to be taken into account and used wisely. And remember - all those indicators could be broken, do not rely on them 100%, and use at least 3 of them while trading.
More detailed reading on every forex trading indicator I will provide in days to come.