If you’ve just started to develop a strategy and get to know MT4 with a demo account, odds are that the options when it comes to forex indicators seem to be very varied.
This is good and bad: good because you can find or customise an indicator to fit pretty much any strategy, bad because it can be difficult to tell which indicators are the most appropriate for you when you’ve just started.
In this post we’re aiming to introduce three of the most widely used forex indicators for new traders, explaining briefly how they’re calculated and how they can be used in practice.
This is arguably the most commonly used forex indicator of all. It’s simple to set up and the data it displays are easy to understand, making it very popular among newer traders.
RSI measures when an instrument is overbought and oversold on a scale of 1 to 100. This is calculated based on the average gain or loss over the preceding periods, typically the last 14 periods on the chart.
The overbought zone is when RSI reads 70 and above, while the oversold zone is when it reads 30 or below. These ‘trigger zones’ are used in various different trading strategies.
The standard and arguably easiest way to use RSI is as an identifier of pullbacks. Taking the screenshot above, for example, the trader might want to enter a selling trade but be wary of cable being oversold.
RSI in the oversold zone in the blue highlight would suggest that the trader should wait for the pullback and only then enter a trade. This way, risk can be decreased and you can avoid entering movements that are close to exhaustion.
Another very common forex indicator, Bollinger Bands are also straightforward to set up and generally display data in a manner that’s readily actionable.
The bands form a channel around the price of an instrument and its movements: this channel is based on a simple moving average and standard deviations from this.
Bollinger Bands are most commonly used to demonstrate the direction of a trend, but uses that should not be overlooked are confirming RSI’s signals in spotting reversals and measuring levels of volatility.
If an instrument is trending upward, price will usually run along or at least touch regularly the upper band. If this doesn’t happen, this is often a sign of lower momentum.
Bollinger Bands can also be used combined with RSI: if price touches or moves outside the upper band during an uptrend and RSI also indicates overbought, this is usually a clear sign that a reversal will occur soon.
The third of our commonly used forex indicators, parabolic SAR is another one that’s suitable for newer traders because of its relative simplicity and tendency to give clear signals.
Parabolic SAR uses the most recent highs and lows in price with an acceleration factor to display dots on a chart that help to confirm trends. The calculation’s a bit more complicated (check it out here), but MT4 does it for you so there’s no need to keep track of it exactly before you might act on the indicator’s signals.
Very basically, traders look to buy when parabolic SAR displays below price and sell when it’s above price. The problem with doing this though is that this indicator gives constant signals.
Many traders would recommend that parabolic SAR’s primary use should be for confirming signals received from other indicators, including the RSI-Bollinger combination highlighted above. This way you only act on signals in the direction of an overall trend.
This really depends on your strategy and which instruments you want to trade, but for newer traders the advice to use a variety of indicators as part of a careful strategy to manage risk is a good start.
The most commonly used indicators are likely to be good options if you’re new to forex: these indicators tend to be popular because of their relative simplicity. A simple and easy to follow strategy isn’t a guarantee of success by any means, but starting simple does mean there’s less to go wrong.
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