Forex factory

Lauren Sawyer

Four Essential Indicators Every Forex Trader Must Have 


A lot of foreign exchange traders spend plenty of time searching for an ideal moment to make an entry into the market, or seeking for a definite sign that it is time to exit a trade. Although it could make for a fascinating experience, without knowing exactly when to enter or exit a trade, you can trust that you will not be successful and make a profit. All successful traders are aware that professional Forex trading is about building a ‘Forex factory’, equipped with a choice of trading tools, such as indicators. Some of the most important of these tools include: 

1: The Follow the Trend Tool 

Successful Forex trading is possible through a countertrend approach. However, most traders will find it much easier – and ultimately more profitable – to run their Forex trades through a strategy that seeks to follow the trending direction of a currency pair. As they say in Forex trading, the trend is your friend. This is where the trend-following tool becomes important. Because many people fail to understand what trend-following tools can really do, they are often used as separate trading systems when they should actually be utilized as indicators to decide whether a long or short position should be entered in to. 

One of the best trend-following tools is the moving average indicator. Although there are investors who will swear by a particular combination, the truth is that you will reap the most benefit from your Forex factory by deciding combinations of moving averages which best fit your timeline and the asset you are trading. 

2: The Confirmation of Trend Tool 

At this point, you have a handy trend-following tool to let you know whether a currency pair is generally moving up or down. Is this really a completely reliable indicator? The problem is that trend-following indicators tend to be poor at determining sudden, unexpected moves within the market. For this reason, it is nice to have some way to tell if the trend-following indicator’s predictions are correct. To do this, you need to use a trend-confirmation tool. 

Indeed, one of the most useful – and popular – of these is the MACD (moving average convergence divergence) indicator. This is an indicator that plots the difference between a couple of smoothed moving averages. After smoothing this difference exponentially, the indicator than compares the results to its own moving average. 

3: The Overbought/Oversold Tool 

Although the majority of traders are advised to trade according to the direction of an established major trend, they still have the task of deciding whether they should jump in as soon as this trend is established or to enter the market following a pullback. In essence, a bullish trend gives you the choice to trade on either strength or weakness. 

There are many tools available for your Forex factory that fit the bill. One of the most useful for this purpose is the three-day relative strength index (RSI). This is an indicator that looks at the cumulative up and down days over a particular period, resulting in a value between zero and 100. If a currency pair’s price action is generally down, the value will approach zero, while the inverse is true of a currency pair generally trending up. 

4: The Take Profit Tool 

When trading in the Forex market, you need a way to figure out the moment to take a profit on winning trades. This category also offers you many choices, including the previously mentioned 3-day RSI. For example, a trader holding a long position could consider profit-taking when the RSI rises to a figure above 80. On the other hand, a trader with a short position could take some profit if the RSI indicates 20 or less. 

Yet another useful profit-taking tool is called Bollinger Bands. It is a tool which works by subtracting the standard deviation from changes in asset prices over a particular time frame from an average closing price over the same period to come up with ‘trading bands.’ 

Take the time to fill your Forex factory with the right tools to help you trade accurately and effectively. If needed, adjust these tools based on your trading preferences and the movements in the markets.