FX Trading: Popular Indicators

One major component of technical analysis is made up of indicators such as Bollinger bands, the MACD, Parabolic SAR, Stochastics, Relative Strength Index and many more. Each of these indicators measures the market from one viewpoint or another and are used to attempt to accurately forecast a trend continuation, a reversal or to determine entry points.

FX Trading: Bollinger Bands

In FX trading, Bollinger bands measure the volatility of a market. The more volatile the market, the wider the space between the bands will be, and the less volatility the smaller the gap will be. While the mathematical formula behind Bollinger bands might be fascinating, the method used to calculate this indicator is of no use to traders. However, what is important to traders is the fact that the price tends to retrace to the center of the bands, where each band acts as a support and resistance level. This is known as the Bollinger bounce. Therefore, if price is touching the top band, or resistance level, it is safe to assume that it will bounce towards the middle, which would offer a good trading opportunity.


The Bollinger squeeze refers to the moment when the bands contract and price is trending in a very narrow channel. When the bands contract, this usually signals that a breakout is about to occur. The narrower the channel, the stronger the breakout will be. The exact direction of the breakout cannot be predicted, but if price breaks through the resistance, or top band, then it is safe to assume that the market will be moving into an upward trend. Therefore, a trader could place entry orders at a set level above the resistance level or below support to catch the breakout, no matter which direction the market moves.

FX Trading: Stochastics

In FX trading, stochastics are a powerful indicator that can help traders predict where a trend might be ending, in other words a reversal. This is because a stochastic is an oscillator, or a leading indicator, that measures overbought and oversold conditions in a market. When a market is overbought, this means that buyers have bought all they are going to for that session and the sellers will take over, driving price down. The same is true, but in reverse, for oversold conditions.


Stochastics are plotted as two lines on a scale of 0 to 100, usually on a graph below the chart. When the lines are above 80, this signifies an overbought market and when they drop below 20, this implies an oversold market. The idea is to sell in overbought conditions and buy in oversold market conditions.

FX Trading: Relative Strength Index

The Relative Strength Index (RSI) also indicates overbought or oversold market conditions and is plotted in a similar fashion to stochastics. However, the main difference and its effectiveness in FX trading lies in the fact that it can also confirm the formation of a new trend. Therefore if you feel an upward trend may be forming you can verify this by checking whether the RSI is above 50 or below 50 for a downtrend.


In FX trading these indicators can be used in a variety of ways, in conjunction with others, or on their own to confirm visual chart analysis. Each trader develops their own strategy according to what works for them, and once you learn how to approach FX trading correctly, you too will be able to devise your own strategy.

Related posts:

1. Understanding the Difference between Oscillators and Momentum Indicators
2. The Forex Market Trade: The Pitfalls of Indicators
3. FX Trading with Chart Patterns: Head and Shoulders