Technical indicators are essential for any trader who relies on technical analysis of the charts to know where and when to place orders. Even fundamental analysts can still make use of technical indicators to know their profit targets after studying the economic calendar Forex. In short, they are absolutely necessary for every trader, whether they deal with the Forex, commodity or stock market (Basics of stock trading)
Previously, we have looked at the best technical indicators and how to use them, but those were the most popular technical indicators. All Forex trading platforms will have many more technical indicators, and some of them which aren’t very popular. Still, they can be very useful if you know how to use them, and here are a few of them:
Williams’ percentage range (Williams %R)
This indicator is a typical oscillating indicator that gives values on market conditions. You may even notice that it closely resembles the fast stochastic oscillator. That’s because the method of calculation is very similar, but the Williams’ %R has the advantage of quicker fluctuations. This allows it to be used to track price movements regardless of how fast they occur, making it applicable during high volatility periods.
Values range from 0 to -100, whereby the area between 0 and -20 represents overbought market conditions while the -80 to -100 area, the oversold market conditions. Due to its fast response to price changes, the Williams %R can be used to catch trends early. The key when dealing with this indicator is to watch the -50 line, which represents the switch from a bullish to bearish sentiment and vice versa. (Forex market sentiment indicators)
When the prices cross the -50 line upward, the bulls are active, and long positions are advised. Otherwise, if the price crosses this line to the downside, then it’s a bearish market and you should place short positions.
From the image above, you can see the various areas where prices crossed the -50 mark to create a strong trend either downward or upward. In addition, when prices failed to cross the -50 line, it indicated that the previous trend was still active. Therefore, this indicator can still be used to tell whether a change in market direction represents an actual reversal or a fake-out.
Commodity Channel Index (CCI)
As its name suggests, this indicator was initially developed for analysing the commodity market (Trading commodities). The formula involves taking the current price of the commodity and deducting it from the SMA, then dividing the result by the mean absolute deviation. Okay, so you probably don’t care about the math behind it, and you don’t even need to, let’s skip to the good part.
Once you load the indicator onto the Forex charts, it will have values ranging from 100 to -100; the zero acts as the pivot. The two extremes are what you should concentrate on, because they represent market conditions. When the indicator is trending above the 100 level, it’s a signal to buy; and when trending below -100, this is a signal to sell.
Above, you can see how trends were either bullish or bearish when the CCI indicator was trending above 100 or below -100. The area between 100 and -100 does not provide a trading signal, just the indication that market sentiment may be changing.
The CCI indicator also works very well with divergence to indicate when the trend is about to reverse. In the image below, you can see how the CCI indicator displayed a positive divergence that led to a very strong rally thereafter. This is another excellent use of this indicator (Learn more about the 5 secrets of Divergence in Forex)
Average Directional Index (ADX)
This is another indicator developed for the purpose of analysing the commodity market. The creator, Wilder, first introduced the concept in his 1978 book on technical trading. He is considered among the pioneers of technical analysis, and he had published several other books that also focused on technical analysis. (Comparing fundamental and technical analysis)
The ADX indicator was created to determine the strength of a trend, but it did not necessarily tell the direction of the trend. To improve upon this deficit, 2 other indicators were bundled with the main ADX indicator to determine the direction of the trend. These additions were referred to as minus directional indicator (-D1) and plus directional indicator (+D1).
The main ADX indicator is the thicker line in a light blue colour. As mentioned earlier, it is used to show the strength of a trend but not the direction. Wilder created the ADX to show if a trend was present whenever it was ranging above 25. The trend could be bullish or bearish, but as long as it was above the 25 level, then there was a trend. From the above image, you can see the various regions when ADX was above the 25 mark and confirm that the markets were trending.
To tell the direction of the trend +D1 and -D1 were introduced – when +D1 is above -D1, then the trend is bullish, and when -D1 is above +D1, then the trend is bearish.
The ADX indicator can be a very useful tool for a swing trader who prefers to hold on to trades for the entire trend, because it can tell you when the currency pair is trending strongly.
Average True Range (ATR)
This indicator was also introduced in the same book as the ADX indicator. The ATR indicator only shows the level of volatility, but not the direction of price movement. Unlike ADX, there have not been any modifications to include directional data on the ATR indicator.
The ATR indicator can either rise or fall sharply whenever a big move is about to follow. However, without directional information, you may have to include a second technical indicator to determine market direction. In the above example, I’ve used the stochastic indicator to show whether the markets were overbought or oversold at the points when the ATR indicator was spiking.
If markets were overbought, the change in ATR would signal a downward trend and if oversold, the ATR would signal a strong upward trend. Despite this shortfall in the ATR indicator, it is excellent for placing short-term trades because it alerts the trader of a potential move earlier than typical technical indicators, making it an invaluable resource to the scalper. (10 rules of how to earn money with scalping)
If you’re not sure how much you can rely on technical indicators, learn from this video: