2Bull Forex Blog

If you are devising a Forex trading strategy and using technical analysis you will need some indicators to help you execute your forex trading signals and below, we have outlined six essential indicators that any trader should consider using on their forex charts.

1. Moving Averages

A great back indicator to trend lines for seeing the direction of the trend.

Moving averages should not be used on their own to enter trades but combined with other indictors.

Moving averages in longer term time frames work best and I find the 200 day MA important and also use the 40 day and 18 day MA useful. Never use short term averages as trends need sufficient periods of data to be effective.

2. Bollinger Bands

If you want warnings of trends developing, or a tool to help you sell high volatility to execute trading singnals i.e. open new positions or to lock in profits, then Bollinger bands are ideal.

Like moving averages, this indicator is simply there to show you the opportunity and you should time your entry with other tools.

3. Net Trader Positions

This is simply one of the best tools there is for spotting the big contrary trades and is realized bi-weekly by the CFTC. Although it applies to futures markets, the data can be used for spot currency markets as well.

This tool will help you spit every major trend change in advance.

The reason for this is, it breaks the open interest in speculative and commercial positions.

We don’t have room to explain the full logic here - but in essence speculators are always heavily net long at important market turning points while the commercials ( smart money ) are short.

By looking for divergences in speculative and commercial positions and looking for extremes, you can spot the big turning points coming.

So far we have looked at tools that can alert you to trading opportunities in your forex trading strategy – now, its time to look at some indicators to time entry on your forex charts and we have picked out 3 of the best.

4. Stochastic

George Lane, who developed the indicator, concluded that in an uptrend, prices tend to close near their high, and in a downtrend market, prices tend to close near their low.

This may sound simple, but the stochastic is simply one of the best momentum indicators out there for entering trades and taking profits.

5. Relative strength Index (RSI)

This indictor complements the above indicator perfectly and is another superb indicator to have in your forex trading strategy.

The RSI, as its name implies measures the relative strength of price currently compared to the past and gives you an idea of how strongly a market is trending.

This is one of the most popular momentum indicators in the world and was developed by trading legend, Wells Wilder as is the next indicator

6. Average Directional Movement (ADX)

The ADX is a momentum indicator, which aims to measure the strength of the trend - and attempts to determine if the market is in a trend or not.

The ADX line is a great momentum indicator and will help you trade the strongest trends - and give you advance warning of changes in momentum for profit taking or contrary trades.

So there you have six great technical indicators to incorporate in your forex trading strategy. There are of course others worthy of consideration, but these 6 are the ones I have used for the last 25 years and found them highly effective in my own forex trading systems and think you will to.

Take a look at them and see for yourself – Good trading

Many forex traders look to trade scientifically using the theories of Gann, Elliot and Fibonacci to name but a few – which is best though and how do these theories work?

Let’s find out.

Scientific theories postulate that as human nature is constant.

What has happened in the past will happen again and repeat itself in the future and all you need to do is trade these repetitive patterns – this is really the basis upon which technical analysis is based#.

Scientific theories take it a step further - by saying their theories represent “natural law” and can predict the future.

Forex traders buy these theories in huge numbers and believe them - but they don’t work.

Lets take the theories of Elliot (who died a pauper) and W D Gann (who had to sell courses to make a living) and ignore the fact they couldn’t make money out of their own theories and look at why these theories cannot work for anyone. I have totally ignored Fibonacci, as this is not a financial theory at all but was devised to solve a problem to do with copulation of rabbits in the 12th century!

So why don’t they work?

The answer is obvious:

If there was a scientific theory for market movement we would all know the price in advance and their would be no market! A market moves due to the difference of opinions and is unpredictable.

This really is common sense and trading is really an odds game not a scientific theory but the far out investment crowd can’t get enough of these theories and buy into them.

Of course there is another problem with these theories which is never mentioned:

If a theory is scientific then it should be objective and tell you exactly what to do as it is following the law of the market. Check out Elliot wave, it’s supposed to be objective but it’s totally subjective!

It’s a scientific law and you have to decide which way prices are going -does that sound scientific to you?

Fibonacci levels are great though, you get specific retracements – try and use them and see how quickly you wipe out your equity! This is simply the dumbest theory of the lot. No disrespect to Leonardo Fibonacci though, he had no idea when he devised the theory in the 12th century it would be hijacked by financial traders!

The fact is these theories appeal to lazy, naive or far out investors and its obvious there is no scientific law that dictates market movement.

If you want to know how markets really move then look at some sensible theories and perhaps the best one to start with is Dow Theory.

Trading forex (or any other financial market for that matter) is simply about trading odds nothing more.

Now the fact you are trading odds doesn’t mean you can’t make a lot of money – you can.

Don’t look for short cuts or think you can cut the risk with scientific theories you cant – you need to do your homework and come up with a theory to help you trade the odds.

If you do this correctly you could soon be building big profits.

Leave the scientific theories to the dreamers and concentrate on the reality of winning.