Any technical trader’s method includes the use of trading indicators. It could give you more insight into price trends when used in conjunction with the appropriate risk management tools. Here are the top 10 trading indicators.
Trading Indicators Explained
Using technical analysis as part of your approach can be beneficial whether you’re interested in trading forex, commodities, or shares. This includes researching different trading indicators. Trading indicators are calculations that are displayed as lines on a price chart and can be used by traders to spot specific market signals and trends.
Leading and lagging indicators are two examples of the various sorts of trading indicators. A lagging indicator looks at historical trends and signals momentum, whereas a leading indicator forecasts future price moves.
Best trading indicators
- Moving average (MA)
- Exponential moving average (EMA)
- Stochastic oscillator
- Moving average convergence divergence (MACD)
- Bollinger bands
- Relative strength index (RSI)
- Fibonacci retracement
- Ichimoku cloud
- Standard deviation
- Average directional index
You can choose which of these trading indicators best fits your approach by taking into account your knowledge and risk tolerance. Although not rated, the indicators on this list represent some of the top options for retail traders.
1) Moving average (MA)
The MA, often known as the “simple moving average” (SMA), is a tool used to determine a current price trend’s direction without being influenced by shorter-term price surges. The MA indicator creates a single trend line by adding together the price points of a financial instrument over a predetermined time frame and dividing them by the total number of data points.
The type of data is dependent on how long the MA is. For instance, 200 days of data are needed for a 200-day MA. You can research levels of support and resistance and view prior price action by using the MA indicator (the history of the market). This implies that you can also identify potential trends for the future.
2) Exponential moving average (EMA)
A different kind of moving average is the EMA. It prioritizes recent data points more heavily than the SMA does, making data more responsive to fresh information. EMAs can assist traders in validating large market moves and determining their legitimacy when used in conjunction with other indicators.
For short-term averages, the 12- and 26-day exponential moving averages are the most widely employed; for long-term trend indicators, the 50- and 200-day EMAs are used.
3) Stochastic oscillator
An indicator called a stochastic oscillator measures momentum and trend strength by comparing a given asset’s closing price to a range of its prices across time. It uses a 0 to 100 scale. An oversold market is often indicated by reading below 20 and an overbought market by reading above 80. However, a correction or rebound may not necessarily follow in the presence of a strong trend.
4) Moving average convergence divergence (MACD)
The MACD indicator compares two moving averages to find changes in momentum. Trading professionals can use it to find potential buy and sell opportunities at support and resistance levels.
When two moving averages “converge,” they move toward one another; when they “diverge,” they move apart. Momentum is said to be decreasing when moving averages converge but increases when moving averages diverge.
5) Bollinger bands
An indicator called a Bollinger band shows the normal trading range for the price of an item. The band’s breadth fluctuates to reflect the recent volatility. The perceived volatility of the financial instrument decreases as the bands go closer to one another, or as they become “narrower.” The perceived volatility is larger the wider the bands are.
Bollinger bands are mostly used as a technique to forecast long-term price changes and are useful for identifying when an item is trading outside of its typical levels. Price fluctuations outside the upper and lower bounds of the band may indicate overbought or oversold conditions, respectively.
6) Relative strength index (RSI)
RSI is primarily employed by traders to aid in the identification of momentum, market conditions, and alerts for potentially harmful price fluctuations. An integer between 0 and 100 is used to represent RSI. An asset near the 70 levels is frequently seen as overbought, whereas an item at or near the 30 levels is frequently regarded as oversold.
An overbought signal indicates that assets may be due for a price correction and that recent gains may be maturing. In contrast, an oversold signal may indicate that recent dips are maturing and that assets are likely to rebound.
7) Fibonacci retracement
The degree to which a market will veer from its current trend can be predicted using the Fibonacci retracement indicator. When the market temporarily declines, this is referred to as a pullback and is referred to as retracement.
Traders frequently utilize Fibonacci retracement to validate their predictions of impending market movement. This is because it makes it easier to spot potential points of support and resistance that can point to an upward or downward trend. This indicator can help traders decide where to place stops and limits, as well as when to enter and exit their positions because it allows them to pinpoint levels of support and resistance.
8) Ichimoku cloud
Like many other technical indicators, the Ichimoku Cloud pinpoints areas of support and resistance. But it also gauges price momentum and sends cues to traders to aid in their decision-making. Ichimoku literally translates to “one-look equilibrium chart,” which is exactly why traders who want a lot of information from a single chart employ this indicator.
In a nutshell, it analyses market patterns, displays the present levels of support and resistance, and also projects levels for the future.
9) Standard deviation
An indicator that aids traders in gauging the magnitude of price changes are the standard deviation. They can therefore determine how likely it is that volatility will have an impact on the price in the future. It cannot anticipate whether the price will move up or down, simply that it will be affected by volatility.
The standard deviation contrasts recent price changes with earlier price changes. Many traders hold the opinion that major price moves come after little ones and that minor price moves come after big ones.
10) Average directional index (ADX)
The ADX shows how strongly a price trend is moving. It operates on a scale from 0 to 100, with a reading of more than 25 indicating a strong trend and less than 25 indicating a drift. This data can be used by traders to determine if a trend is likely to move higher or downward.
Depending on the frequency that traders desire, ADX is often based on a moving average of the price range over a period of 14 days. Keep in mind that ADX never predicts how a price trend will evolve; it only identifies the trend’s strength. When a price is falling, the average directional index may increase, indicating a strong downward trend.