Have you ever wondered what indicators forex trading signals providers use before sending out their signals?
Forex indicators are designed to identify certain trends in the market — and, therefore, to create knowledgeable trades based on current and prior behavior. One of the major benefits to using a forex signal provider is that you don’t need to worry about tracking these forex indicators on your own; instead, the provider does it all for you.
But exactly how are they deriving their winning strategy?
Why a Forex Signals Provider uses Indicators
Most forex trading signals will use a combination of moving averages or MACD indicators. Traders may wonder why they can’t use these indicators on their own — forex signal providers don’t just give out their indicators, but they also determine the amounts of the trade, the take profits, and the stop losses. The indicators used by signals are building blocks to healthy trading, however.
Indicators are designed to show a trader which way a trend is moving — and trends are the only way to reliably determine the direction of the market.
A reliable forex signal provider will crunch a large amount of data and numbers to determine their indicators and then initiate trades once they are certain that these indicators are following the current trends. Traders are able to reap the benefits of these indicators without necessarily having to follow them on their own. These indicators are designed to simplify past performance in a way that makes patterns easier to see for the trader.
From there, a consistent behavior pattern needs to be followed to create a trading strategy.
The Main Indicators Used for Forex Trading Signals
MA: Moving Averages
Moving averages are the simplest way to track most trading.
It’s designed to create a “smooth line” of moving price ranges in addition to when the price crosses over or under this line — in other words, it is used to identify when the price hasn’t quite met trend. In simplest terms, moving average indicators show when the price should move up (based on the moving average) and when the price should move down (based on the moving average), with the assumption that the currency pair is moving towards a form of equilibrium. The farther away the currency pair trading price is from the moving average, the more likely there is to be a correction in the appropriate direction. Thus trades should always be initiated towards the moving average. If the current price is below the moving average, it should be bought; if the current price is above the moving average, it should be sold.
The curvature of the moving average can matter too; it will reveal whether the currency pair is stable or if it is experiencing relatively high volatility. A very extreme divergence from the moving average could indicate either a significant opportunity or a break away; either way, a savvy trader will be cautious.
MACD: Moving Average Convergence Divergence
The MACD strategy is based on two lines. One line is the fast line and the other is the slow line.
The MACD strategy sends an indicator for buying if a fast line is able to traverse the slow line from above; likewise, if the fast line will cross below the slow line, a sell signal is indicated. MACD strategies can be fairly simple; if a trade is indicated to be up above the zero line on MACD for a long period of time, it’s considered to be trending upward. If a trade is indicated to be below the zero line on the MACD for a long time, it’s considered to be trending downward. Trades can be initiated as desired. MACD is used by a significant amount of traders. It is generally considered to be a little more complex than simple moving averages, but it also gives out more information without being extremely complex. Many forex trading signals use MACD indicators for this reason.
RSI: Relative Strength Index
The RSI operates similarly to the MACD but with more levels of subtleties. The RSI is designed to create a number that starts at zero and ends in 100. It predicts that indicators that are above 70 indicate that a downturn is going to occur and that indicators below 30 mean that a bounce is about to occur. Therefore traders can use RSI as a type of resistance trading; whenever their currency pair is above 70 they can sell, whenever the currency pair is below 30 they can buy — though naturally this is a bit simplified. Some traders instead use the Relative Strength Index to avoid trading when a currency pair is indicated at either 70 above or 30 below, as this can be indicative of a more volatile pair; it depends on the individual risk of the trader.
OBV: On Balance Volume
OBV is designed to indicate the volume of trading in addition to the trading behavior. It is an indicator that is used with otherindicators to determine whether a currency pair is being over traded or under traded. If the OBV is rising, traders know that there is more activity occurring. If the OBV is falling, traders know that less volume is being traded. Depending on their other indicators, they may find that they have an excellent opportunity or a situation that they shouldn’t enter into. The OBV is more often used in stock trading but it is often used by more advanced forex traders who are worried about the volatility that volume can provide or who are trying to establish future trends.
Enhanced Indicators from Forex Signal Providers
Of course, signal providers don’t just use out-of-the-box indicators. Most of them have developed their own trading strategies over time — it is that expertise that an individual pays for when they purchase forex trading signals.
For many traders it’s generally recommended to “Keep It Simple”.
It’s simply not possible for most individual investors to spend hours upon hours weighing up the numerous considerations when initiating trades. Even when programming a platform like the MetaTrader 4 to track trades, you will find your trading strategy paralyzed when new information enters the equation. Forex signal providers have no such concerns; they are constantly updating their trading strategy with the markets and have the advanced technology to create more complex and therefore more accurate algorithms.
It’s not necessary to understand forex indicators to properly follow forex signals, but it can give you a head start on understanding why certain trades are initiated and on deciding whether trades fit your unique trading temperament.
Try reading our complete guide to using forex signals
Forex trading signals always work best when you follow a strategy consistently, but as you grow as an investor you may want to customize your trading account and trades to suit you.