Forex Indicators and Trading Charts – an introduction

What are Forex Indicators and Charts?

Trading Charts and Forex Indicators are tools that are often included in the different trading platforms and are typically reprogrammed overlays that you can select and view according to the trading strategy you are using. Each broker will have a different range of preset options to use for charts and indicators even if they are both offering the same platform.

Therefore, an MT4 account with two different brokers would most likely come equipped with different trading charts and forex indicators based on those prioritised by each. It is important if you are looking to use a particular chart pattern or indicator that you would typically associate with MT4, MT5 etc… that you do not assume that it will be provided by all. It is always best to verify that directly from reviews or via a demo account. You can see some information regarding what types of charts or indicators are offered in our detailed reviews.

Selecting which trading charts and indicators to use can be difficult but you can get ahead by testing the different types and choosing the most suited ones on a demo account rather than using real funds.  

What are Moving Averages (MAs)? The Forex Trading Indicator Original

A moving average (MA) is a forex indicator that is commonly used tool in technical analysis, it helps flatten price action and allows you as the user to follow trends based on a series of historical prices.  To calculate a moving average; you can take an average of all the closing prices and divide it by the selected time period.  This will then give you a trend line of past data which can help filter out unrelated anomalies from short term price fluctuations.  

You can use moving averages to help see the direction of trends and help envisage support and resistance levels for successful trading.  Moving averages can provide useful insight to current trends, and they also form the basis of many other technical forex indicators.     

Different types of Moving Averages

  • Simple moving averages (SMA). The most basic moving average. Historical closing prices are added together and divided by the selected time period.
  • Exponential moving averages (EMA)- more advanced than the Simple Moving Average.  It helps to correct the equal weighting provided by the SMA by allowing more weighting and emphasis for the recent prices which will reflect the current market positions.  Therefore, an EMA is a more in-depth technical analysis tool than the SMA.
  • Weighted moving averages (WMA) – Weight Moving Average is a simpler version of the EMA. The weighted values should add up to 1 or 100%, with the weight of each closing date equally distributed and the highest weighting would be given to the most recent closing price. Essentially putting a priority on more recent performances.
  • Smoothed moving averages (SMMA) – Smoothed Moving Average is like the EMA but accounts for a longer time period so gives a more holistic view.  SMMA considers all past data and does not remove past data points as new data is added. 

The Moving Average Convergence Divergence (MACD) 

The MACD indicates where the selected moving averages converge and diverge.  Convergence occurs when moving averages move towards one another. Conversely, when the moving averages move away from each other, a divergence will be presented. 

Traders use this to visualise the ratio between EMAs (Exponential Moving Averages) so this can enable you to identify possible new trends or interesting momentum to enhance your trading strategies. Definitely one of the more used forex indicators.

The Parabolic SAR

The Parabolic SAR is another indicator that is very much like a moving average.  It is used to highlight when prices fluctuate, it is commonly known as the “stop and reversal system”  The parabolic SAR appears on a chart as a series of small dots either above or below the asset price and is used to guide the trader of potential entry and exit points.

The Awesome Oscillator

The Awesome Oscillator, the silly sounding but commonly used indicator helps predict the momentum of the market.  It helps you to visualise the different ratios between moving averages over set time frames.  

It differs from other simple moving averages since it is based on the median price, rather than closing or opening prices.  The awesome oscillator is calculated by finding the difference between a 5 period moving average, and a 34 period moving average.   

Bollinger Bands

Bollinger Bands is an indicator that can track volatility by charting 2 standard deviations above and below a moving average. 

The bands tighten and widen at different points to highlight when there may be a movement in price so it can be a useful action tool.

Volume Indicators

Volume indicators help you as a trader to visualise the amount of daily trades made.  These are shown as vertical bars at the bottom of the chart and indicate interest or lack of interest. 

Volume indicators are very commonly found in almost all brokers’ trading charts toolkits and are especially useful for forex trading.

Alligator Indicator

The Alligator Indicator is based on 3 moving averages and helps you to assess the movement within the market. 

It also helps indicate no trend periods, emerging trends and when you should consider entering or exiting a particular trade. 

The Relative Strength Index (RSI)

The Relative Strength Index is another very popular trading indicator and one of the first that most new traders will look to gain an understanding of.

It is essentially a momentum oscillator that measures the velocity of the price changes and it does this by showing overbought or oversold signals.

Momentum forms a core part of many trading strategies so you will find quite a few variants of RSI within the different forex indicators. 

The Stoch or Stochastic Oscillator indicators

The Stoch Oscillator similar to the RSI, measures price momentum.  It compares current price positions with historical prices, shown as a percentage and indicates potential reversal points with the overbought and oversold signals. 

Cross over signals can also signify buy and sell signals.     

The Average True Range (ATR)

The Average True Range (ATR) measures market volatility of a specified period and helps you to identify markets with higher price fluctuations in comparison to more stable markets.

This helps indicate the best times for you to buy or sell and how much leverage you may wish to use in your trades during varying volatility periods.

The Average Directional Movement Index (ADX)

The Average Directional Movement Index is a trend indicator that can help you to analyse the strength of a trend before there are any price movements in a single direction.  It can also be useful to try to detect volatility within the market.

A Fractal

A Fractal is a lagging indicator made up of a minimum of five bars and is usually bullish or bearish.  

Fractals are best used in conjunction with other forex indicators as part of a more complete trading strategy.      

Commodity Channel Index

The Commodity Channel Index indicator is another oscillator indicator that measures the momentum of price movements.  It can be used to identify cyclical trends and identifies overbought and oversold levels.

Introduction over, what comes next?

From this base introduction to some of the more common types of trading charts and indicators we would not expect you to have a full picture as to the specific differences of each as we will dig into this in other detail pages.

You can see that many of the forex indicators are designed to show quite similar things but the devil here is in the detail of exactly which specific data points are taken.

There is no toolkit of trading charts and indicators that are going to be suitable for all traders so it is important that you test a few of these out on demo accounts before deciding on which ones to build into your strategy more permanently. 

Remember, there is no ‘one size fits all’ trading strategy as there is no guaranteed way to profit from every trade. With some time and a tested strategy that you execute time and time again, you can work towards being one of the successful traders that make a good income from your trading.

If you would like to know more about the details of a specific type of trading chart or indicator, feel free to go through to our learning zone or request a more in depth explanation. If this all seems rather a lot to get your teeth into just now, you can always look at one of the varying Copytrading options or managed accounts that are available but mastery comes with time!