Increase the Success of Your Trading Positions With the Best Technical Indicators

Technical indicators are a major part of market analysis. There is no trader who could trade successfully without the usage of technical tools. There are numerous indicators, but not all of them are effective. However, we have tried to combine the most reliable technical tools for trading.

In this article, you will learn what technical indicators are, what categories they can be divided into, which 20 indicators are the most effective, and how to use them to have successful trades.

What Are Technical Indicators?

Technical analysis is one of the cornerstones of market analysis. It includes various technical indicators, as well as chart and candlestick patterns. These tools provide signals on the future price direction. Unlike fundamental analysis that relies on the recent news, data, events, and current market conditions, technical analysis is based only on historical price actions. It’s a disadvantage of this type of analysis, as it can give signals on the potential price movements. As technical analysis doesn’t consider current market circumstances, a trader can’t fully rely on its trading signals.

A technical indicator is a mathematical calculation that considers the previous price or volume of an asset to provide certain signals on its upcoming direction. Technical indicators can be used for any asset that has historical data, including currencies, stocks, ETFs, cryptocurrencies, and commodities. Technical indicators are mostly applied to Forex, commodity, and cryptocurrency markets, where traders prefer trading in the short term.

Below, you can see the advantages and pitfalls of applying technical indicators when trading.

What Are the Basic Types of Technical Indicators?

As there are numerous technical indicators, they must be structured somehow. They can be divided into five categories: trend, mean reversion, momentum, volume, and relative strength.

Moreover, these categories include lagging and leading tools. A lagging indicator provides a historical report of conditions that led to the current rate. In comparison, a leading indicator is used to forecast where the price is going.

Let’s return to the categories:

• The trend category includes lagging indicators that analyze where the price moves (upwards, downwards, or sideways) within a certain period.
• Momentum indicators are leading indicators that measure how fast an asset’s price changes over a certain period.
• Relative strength indicators evaluate fluctuations in buying and selling pressure. They are leading tools.
• Mean reversion indicators evaluate how big a price swing will be before the price retraces. Mean reversion indicators are lagging technical tools.
• Volume indicators include both leading and lagging tools that calculate trades and define whether bulls or bears are stronger.

20 Best Technical Indicators Used by Traders

When choosing from among a wide range of technical tools, you shouldn’t separate which indicators are suitable for beginners and which for professional traders. If an indicator is effective, it should suit any trader regardless of their experience. We have made a list of the most popular indicators that are widely used by both newbie and experienced traders.

All these tools are presented on the NAGA trading platform. Don’t hesitate to practice them on a demo account.

Moving Average (MA)

We will start with one of the key technical tools that is not only widely used by traders but serves as a base for other indicators. It’s a trend indicator that provides signals with a small time lag.

There is more than one kind of moving average indicator.

• The basic one is the simple moving average (SMA). It’s based on the average of closing prices of the certain period you’re considering. For example, if you implement a 50-day MA, the calculation will consider close prices for the latest 50 days and divide the sum by 50. The MA will change daily, as the oldest close price will be excluded from the calculation, and a new one will be added.
• Exponential moving average (EMA) and linear weighted moving averages (LWMA). We combined these two types of indicators, as they are quite similar. EMA and LWMA react to price changes and give signals faster than others, as they add a higher coefficient to the latest prices when being calculated.
• Smoothed MA. The smoothed moving average is mostly based on determining the trend, as it excludes the price fluctuations the most. The smoothed MA is built on the simple moving average.

When implementing any indicator to the price chart, you can choose its parameters. For moving averages, you can set price, period, and shift.

• Period. The period reflects how many recent prices will be included in the calculation. The most common periods are 50, 100, and 200 for long-term timeframes and 9, 12, and 26 for short-term timeframes.
• Price. This parameter allows you to choose what prices will be calculated - close, open, high, low, typical, or medium. Usually, traders calculate MAs on the close price.
• Shift. You can change shift if you want the MA to move forth or back in time.

Moving Average Convergence/Divergence (MACD)

The next indicator we should mention is, of course, Moving Average Convergence/Divergence, as it’s based on the moving average tool. MACD can’t be called either a trend indicator or momentum oscillator, as it combines features of both types. The indicator is calculated as follows - a shorter-term moving average is subtracted from a longer-term one.

As with any other indicator, you can set your own parameters before applying MACD to the chart. The major parameters are periods of fast and slow exponential moving averages and a simple moving average that serves as a signal line. The standard settings are 12, 26, and 9, respectively. However, you can change them according to your trading strategy. The main rule you should keep in mind is that an increase in the periods will lead to a shortage of trade signals. However, it will allow you to filter false signals. At the same time, shorter periods lead to more frequent signals. But you should be able to filter them yourselves, as they can be fake.

MACD is one of the most popular technical tools, as it provides numerous signals. They are signal and zero line crossovers, convergence/divergence, and overbought/oversold conditions.

Stochastic Oscillator

A stochastic oscillator is a momentum indicator that defines overbought and oversold zones and reflects a trend change by measuring the market momentum.

It can be used in any timeframe. When applying it to the price chart, you can use 5, 3, 3 default parameters, which stand for the slow oscillator (%K), moving average (%D), and slowing, respectively. 3 is used for slowing in most trading strategies. If you lower parameters for other lines, you will receive a fast stochastic that will react to market changes faster. However, you will find many false signals that you will need to filter using other indicators or patterns. If you raise parameters, you will get a slow stochastic that will remove fake signals but reduce their number as well.

It’s a range-bound indicator that moves from 0 to 100. 20 is an oversold level, and 80 is an overbought level — the cross of which defines oversold and overbought zones. As with most oscillators, you can find convergence/divergence between the price chart and the indicator. Also, the crossover of the two lines reflects a change in the price direction.

Bollinger Bands

The Bollinger Bands tool is a trend indicator. It reflects the overall market trend and predicts an upcoming price direction. Bollinger bands are presented by three lines, including two outer bands and a middle one. The middle band is a simple moving average. The distance between outer and middle lines is calculated on standard deviation.

The standard parameters for the Bollinger Bands indicator are 20 for the period and 2 for the deviations. Although you can change the settings as you want, the recommended period should be within the 13-24 range, while the range for the deviations is between 2 and 5. Apply higher parameters for long-term timeframes and lower parameters for short-term.

Bollinger bands provide numerous signals. You can use the middle line as a support/resistance level. In this case, the levels of outer bands can be used as take-profit targets. It’s also believed that the price is supposed to rebound from outer boundaries. So, you can wait until the price touches any of the boundaries and open a position opposite to the current trend.

Ichimoku

Ichimoku Kinko Hyo or simply Ichimoku is one of the most complicated indicators, as it has numerous lines and clouds. However, we should mention it in our list because it provides many reliable alerts.

First, the indicator reflects the overall trend direction. Second, it shows momentum and helps define how strong a trend is. Third, the indicator can be used to determine resistance and support levels. Fourth, you can find buy and sell signals.

Usually, traders use the original parameters of 9, 26, and 52. They reflect Tenkan-sen, Kijun-sen, and Senkou Span B, respectively. You can set your own parameters, but remember that Tenkan-sen’s value should always be the smallest, while the setting for Senkou Span B should be the largest.

Relative Strength Index (RSI)

The relative strength index is used to evaluate how fast and how big the price change is. However, the main signal the RSI provides is whether the asset is overbought or oversold. It allows traders to sell high or buy low, respectively.

The relative strength index has only one parameter you should set. It’s a period. The default value of 14 is used in most trading strategies. So, you don’t need to change it.

Same as the Stochastic Oscillator, the RSI moves within a 0-100 range. The reading above the 70 level signals the asset is overbought. Wait for the indicator to fall below 70 to open a short position. When the RSI falls below the 30 level, it’s a sign the asset is oversold. So, you can buy as soon as the indicator breaks above 30. You can also find convergence/divergence between the price chart and the indicator. It may predict a change in the price direction.

Fibonacci Retracement

Fibonacci retracement is another easy and accurate indicator that is widely used by newbies and experts. This tool uses Fibonacci numbers that allow traders to define support and resistance levels. The Fibonacci retracement levels are 0%, 23.6%, 38.2%, 50%, 61.8%, and 100%. Still, you can add additional levels if you apply a trading strategy based on unusual percentages.

The indicator is drawn based on the strong previous trend. All you need to do is to define the previous high and low and draw a baseline. The Fibo levels will appear automatically. It allows traders to find the points where the price will either correct or change its direction. You can always use Fibo levels to either enter or exit the market.

Average True Range (ATR)

Average True Range or ATR reflects how volatile the market is during a given period of time.

The indicator consists of one line. When it rises, it means the volatility has increased. When the line declines, traders can see that volatility is moving down. However, it may be complicated to determine whether the market is calm or highly volatile, as there are no certain levels the indicator should reach. So, you should draw a central line (either by eye or add a 100-period moving average on the indicator).

When the indicator crosses the central line from bottom to top, it will signal that market volatility is rising. If the indicator breaks below the central line, it will be an alert that the market becomes calmer. This technical tool can also be used to find perfect positions for stop-loss orders.

The standard ATR parameter is a period of 14. You can set bigger periods for longer-term timeframes and smaller ones for short-term timeframes.

Aroon Indicator

Aroon is a trend indicator used to evaluate the strength of the ongoing trend and reflect its direction.

The indicator is presented by Aroon-Up and Aroon-Down lines that move within the 0-100 range. The standard period is 14.

A formation of a bullish trend is confirmed when the Aroon-Up line crosses the 70 level. If it moves within the 70-100 range and the Aroon-Down line is below the 30 level, it’s a sign the uptrend is underway. When the Aroon-Down line rises above the 70 level, traders may expect a formation of a bearish trend. The confirmation of the strong downtrend occurs when Aroon-Down is above the 70 threshold, while the Aroon-Up stays below the 30 level for a while.

You can also catch a signal on the trend reversal when the lines cross each other. When the market moves up, the Aroon-Up line should break above the Aroon-Down line. If the market turns down, the Aroon-Up line falls below the Aroon-Down line. When both lines move as horizontal lines, it’s usually a sign of a market correction.

Commodity Channel Index (CCI)

Traders use Commodity Channel Index (CCI) to gauge the strength of the current trend, as well as to define its direction and detect changes, by reflecting overbought and oversold market conditions.

To apply CCI on the chart, you should define only a period. The default value is 14. If you lower the period, the indicator will be more volatile. It’s recommended to use a higher period of 20.

The indicator contains a line and two key levels of +100 and -100. When the line breaks above the +100 level, the market is considered overbought. Conversely, the fall below the -100 level may predict the price will move up soon, as the market is oversold. Also, the indicator shows the direction of the current trend. If you need to define when the price may move in the opposite direction, you can look for convergence/divergence between the price and the indicator charts.

William %R

Williams Percent Range, or William %R for short, is a momentum indicator. It reflects the speed of the price movement.

It’s another indicator with only one parameter - period. The original setting is 14. However, as with any other technical tool, you can change it if it doesn’t work properly for your trading strategy.

The indicator moves from 0 to -100. If the line is between -100 and -80, the market is oversold. When the indicator fluctuates within the -20-0 range, the market is overbought. You can use these signals to open long and short trades, respectively. However, while you can believe such signals from the stochastic oscillator and relative strength index, you shouldn’t blindly rely on them when applying the William %R tool. Always look for confirmation from other technical tools.

You can also look for convergence/divergence conditions to predict a price reversal. At the same time, the indicator can show you when the strong trend weakens.

Average Directional Index (ADX)

The Average Directional Index (ADX) is a trend indicator that reflects its strength. It’s a common rule that it’s more effective and profitable to open trades within a strong trend. So, for sure, you need it.

It’s one of the easiest indicators. It has only one parameter - period. The default value is 14. However, you can change it if your trading strategy requires it.

The indicator usually consists of one line. It shows the trend’s strength. If the line is below 25, the trend is thick, so you better apply range-trading strategies. The higher ADX moves, the stronger the trend is. All values above 25 signal a strong trend, so you can use trend-trading strategies.

Also, the indicator may include Plus Directional Movement Indicator (+DMI) and Minus Directional Movement Indicator (-DMI) lines. These lines are used to determine buy and sell signals.

Directional Movement Index (DMI)

This indicator relates to the Average Directional Index we mentioned above. Like most indicators we mentioned above, the Directional Movement Index (DMI) reflects the price direction.

It consists of two lines. They are positive directional movement (+DI) and negative directional movement (-DI). When +DI is above -DI, the upward movement prevails. Vice versa, when the -DI line fluctuates above the +DI line, the downward movement is in force. You can also see the beginning of a new trend. As soon as the +DI line breaks above the -DI line, it may be a sign of the emerging trend. When +DI crosses the -DI line from top to bottom, you can expect a new downtrend.

Sometimes, traders add the Average Directional Movement Index. As we mentioned in the previous block, it’s also possible to add +DI and -DI to the Average Directional Index. So, the indicators can be interchangeable.

Klinger Oscillator

The Klinger oscillator compares price to volume and predicts the price reversal based on the comparison. The oscillator follows the concept of force volume. The force volume includes the volume itself, price trends, and temp.

The calculation of the Klinger oscillator is complicated. However, its signals are basic. You can define buy and sell levels based on the indicator movements. The indicator consists of lines. So, when the crossover occurs, you can open either a long or short position. Still, you should know that the crossovers happen frequently. So, it’s vital to filter Klinger’s signals with other indicators
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It’s also possible to find divergence with the price chart. However, traders should be careful, as the divergence may happen far before the market changes its direction. So, there are high risks of false signals.

Volume Weighted Average Price (VWAP)

The volume weighted average price (VWAP) indicator calculates the average asset price over a certain period. It’s a lagging indicator, so you should be ready to get signals a little bit later. However, a time lag may allow you to get a confirmed signal.

The indicator contains only one line that is applied to the price chart and moves either above or below the price. The indicator provides several signals. VWAP allows a trader to compare the current price to a benchmark. Such an approach helps define entry and exit points. It also defines the direction of the trend (uptrend or downtrend).

It’s recommended to apply the indicator to lower timeframes. The signals are less visible on longer-term periods.

SuperTrend

It’s not surprising that a SuperTrend indicator is a trend-following indicator. It’s calculated based on the asset’s price. There are two key settings. They are length and factor. The default values are 10 and 3, respectively. These parameters work well on longer-term timeframes starting from H4. If you apply this indicator with the same parameters on shorter timeframes, you will get lagging signals. That’s why you should lower the settings to get more accurate signals when trading on low timeframes.

SuperTrend resembles the Parabolic SAR indicator that reflects the current trend. SuperTrend is presented by a line that moves either above the price (downtrend) or below the price (uptrend). When the indicator changes its position, you can expect a trend reversal.

Volume Price Trend (VPT)

The Volume Price Trend indicator (VPT) is a trend indicator that defines the balance between demand and supply. It combines price and volume. Entry and exit points are defined by changes in money flow. It’s mostly used on the stock market.

The indicator is used to provide buy and sell signals (signal line crossovers), confirm trend direction, and determine a trend via a divergence with the price chart.

The Volume Price Trend is mostly used on longer-term timeframes. It’s not recommended to apply it to small timeframes and use it as a signal provider for day traders.

You can add a moving average on the indicator that will serve as a signal line so it will be easier to determine whether the market moves up or down. The market trend signal can be confirmed by the ADX indicator. VPT resembles the on-balance volume indicator we talk about below.

Volume

Although most Forex technical indicators use prices for calculations, there are several tools that are based on volumes. We will mention some of them. The first one is volumes.

This technical tool reflects the number of price changes within a certain period (regarding the timeframe you trade on). The indicator consists of green and red bars. If the volume increases, the bar rises. When the volume declines, the bar falls.

You can use the indicator to confirm the trend. If the volume rises along with the price, the trend is confirmed. At the same time, if there is a divergence between the price and the volume, so that the volume declines and the price rises, the current trend is weakening.

On-Balance Volume Indicator (OBV)

The on-balance volume (OBV) is a momentum indicator. It’s used by traders to predict the price change based on volume flow. OBV reflects the market sentiment that can help you predict where the market will move in the near future.

The indicator consists of one line. It moves up when the current close price is higher than the previous one, as OBV is a cumulative indicator. It means that the current volume is added to the OBV total. The line declines if the current price is lower than the previous when. In this case, the current volume is subtracted from the previous OBV total. As the indicator follows the rise and fall of the price, you can define the price direction. Also, it’s possible to forecast a price reversal using the convergence/divergence approach.

Money Flow Index (MFI)

The Money Flow Index (MFI) shows overbought/oversold conditions, predicting a price reversal.

The indicator consists of one line that fluctuates within the 0-100 range. Readings above 80 signal that the market is overbought, while a fall below the 20 level predicts a reversal up, as the market is oversold. 20 and 80 levels may remind you of the stochastic oscillator. Although it looks like many other oscillators, the indicator’s calculation is based on price and volume data.

The only parameter that can change the MFI signals is the period. The original value is 14. Still, you can increase and lower the period. Don’t forget to check how signals will change depending on the new period.

How To Use Technical Indicators

When you implement an indicator on the price chart, you should keep in mind the following tips:

• Set parameters regarding the timeframe you trade on. It’s vital to find the parameters that will allow the indicator to provide accurate signals. The rule is simple: smaller values are good for short-term timeframes, as they provide more signals. Bigger values are better for long-term timeframes, as they filter signals.
• Don’t rely on only one indicator. You shouldn’t believe signals of only one indicator. Every signal should be confirmed by either another indicator or a pattern.
• Don’t use too many indicators. Although it’s recommended to find confirmations from other technical tools, you shouldn’t combine too many indicators. 2-3 indicators are enough to determine entry and exit points.
• Don’t apply similar indicators. To build a reliable trading strategy, you need to use indicators that don’t resemble each other. Otherwise, you won’t get a full picture of the market conditions.

Final Thoughts

Although technical tools can’t provide 100% accurate signals, they are highly important when trading. It doesn’t matter what asset you trade, as technical indicators work for all securities that have historical data.

It’s recommended to combine fundamental and technical analysis to increase the chance of successful trades. While technical indicators provide signals based on the historical price movements, fundamental analysis reflects the current market conditions.