Durable Forex trading strategies are based on some specific indicators, depending on the type of trader you are. But volume trading, scalping, and trend trading each have their own special dynamics to them so markets need specific tools to match their characteristics. Here are the best indicators for these trading styles, and how to use them efficiently.
Volume Trading: How to Measure Activity with Relevant Indicators
Even though forex is a decentralized market with no central exchange, we can measure volume indirectly through tick volume (the number of price changes in a given period). Volume trading assists traders in recognizing areas with high activity, verifying trends, and confirming breakout situations.
Top Volume Trading Indicators:
Volume Profile
• Where it shows the traded volume at certain price levels;
• Displays where the majority of trading is taking place which can help you identify where the support and resistance are.
• Use it to identify areas on the price chart where buyers or sellers are in control.
On-Balance Volume (OBV)
• A volume-based momentum indicator that adds volume when prices are moving up, and subtracts when prices are falling.
When OBV rises, it means buying pressure; when OBV falls, it means selling pressure.
• Look for trends confirmation or divergences with price & volume using OBV.
Accumulation Distribution A/D Line
• Follow the aggregated amount of capital moved in or out of a currency pair.
• A divergence occurs when the A/D line rises on a drop in price, suggesting hidden buying power (bullish divergence).
VWAP (Volume-Weighted Average Price)
• A price-volume line that illustrates the average price at which a security has traded over a certain time period.
• Assists traders in determining if price is overbought (above VWAP) or oversold(below VWAP).
Proper Use of Volume Indicators:
• Breakout Confirmation — High volume confirms breakout strength.
•Volume Confirming Trend or Reversal: Volume Up = Trend, Volume Down = Reversal
Range Trading : Find levels which attract trading volumes (possible reversals).
Scalping Forex: Indicators To Help You Make Quick Trades
Scalping is to make quick and small transactions with the purpose of profiting off the smallest movements in the price. Indicators that provide clear cut entry and exit signals are the go to scalper tool, but they should also offer very little lag.
Best Indicators for Scalping
Moving Averages (MA)
• Basic setups such as 5 EMA vs 10 EMA crossover.
• Identify micro-trends quickly with short term moving averages.
Relative Strength Index (RSI)
• Indicator of overbought and oversold levels
• Of course, scalpers may have RSI settings changed to 5 or 7 periods (the Default is 14) to have more fast signals.
• For example — enter 30 (buy) or 70 (sell) cross of the RSI to trade.
Bollinger Bands
• Made up of three lines: a simple moving average (SMA) and two bands, one between the SMA and one standard deviation above, the other below
• Utilize the forex trader to spot market swings and take profit levels. Apply for scalping when the price touches outer bands.
Supertrend Indicator
• A leading Trend following indicator that provides buy and sell signals.
• if you want to catch short term moves, use it on 1-5 minute charts.
Green = Positive; Red = Negative
Stochastic Oscillator
• Calculate momentum to show over bought and sold line.
• Use it in conjunction with price action or moving averages to gain stronger confirmation.
Tips for Scalping:
• Choose pairs with low spreads and high liquidity such as the EUR/USD, GBP/USD or USD/JPY.
• Get in to the market at the most active levels (London-New York session overlap).
• Implement tight stop-loss orders for risk management
Trend Following: Indicators to Catch the Trend
Trend trading is more concerned with spotting the direction of the price movement and holding positions for longer. This category includes trend indicators, strength indicators, and potential entry or exit point indicators.
Top Trend Trading Indicators:
Moving Average Convergence-Divergence (MACD)
• Based on a histogram that measures momentum on two moving averages and the direction of that moment on the range of the two averages together.
• Bullish when the MACD line crosses above the signal line; bearish when it crosses below.
• Trend strength: Use histogram
ADX — Average Directional Index
• An index that measures the strength of a trend (not the direction of the trend) on a scale from 0 to 100.
• Like a momentum indicator, a value above 25 reflects a strong commitment to the trend. whereas a value below 25, a weak market — or a trendless, sideways market.
• Use ADX together with trend indicators for the strength of the trend confirmation.
Ichimoku Cloud
• A complete trend-following system with support, resistance, trend direction, and momentum
• In the cloud = neutral• Price above the cloud = bullish; price below the cloud = bearish.
• Use it to ascertain infallible graphics and exit points in the trend.
Parabolic SAR(Stop and Reverse)
• Indicator to plot dots above or below the price for trend direction.
• Dots under the price = bullish trend, above = bearish trend.
• To help you place trailing stop-losses.
Fibonacci Retracement
• Pinpoints when the price could pull back before resuming the trend.
• Entering in a trending market using the 38.2%, 50%, and 61.8% levels
Tips for Trend Trading:
• Only higher timeframes (1 hour or greater) for a clearer view of the trend
• Use trend indicators in conjunction with price action e.g. trend lines or chart patterns.
• Avoid low volatility or consolidation trades.
Why it matters: This is important because all traders have different trading styles, preferences, and outlook, and therefore will gravitate towards different indicators for different periods of time and different things, and this looks to provide guidance on the best indicators for youSummary:Eyes are great, but they may not be the best on the table, so decide accordingly.
Volume Tools: Find confirmation of breakouts, trends, and reversals with the OBV, A/D Line and VWAP. This verification of market activity and false signals can be found through these indicators.
Scalping: Only use momentum indicators like RSI, Supertrend, Bollinger Bands, and price-action-based indicators to take benefits from small price changes in a big-liquid market.
Trend Following: Use the MACD, ADX and Ichimoku Cloud to identify and follow robust trends, and make sure you are going with the flow of the market.
At the end of the day, it is about selecting indicators ideal for your trading and learning how they work together. Never put your capital on the line without first developing and optimizing a strategy on demo accounts against historic data.