Guide to indicators that work well together in Forex

Forex traders, especially short-term traders, such as scalpers and day traders, require significant amounts of technical knowledge and data to build durable trading strategies and generate reliable profits. No single technical indicator can be effective for all market conditions. This is why most traders use a combination of multiple indicators to analyze price charts. This article will look at some of the most common indicator combinations used by forex traders. Understanding fx indicators that work well together is critical for short time frame technical traders.

When picking Forex market indicators that work well together, it’s crucial to only pick the indicators that you need. Traders that overuse different indicators end up struggling with making trading decisions. Too many variables and indicators often cause analysis paralysis among traders.

The importance of technical indicators in forex trading

• Technical indicators are mathematical calculations that measure the relationship between factors, such as trend direction, trading volume, volatility, etc.
• Different types of technical indicators are used to measure momentum, trends, trading volume and volatility
• Most technical indicators are used in combination with other indicators to obtain relevant data
• Short-term traders rely on technical indicators to make most of their trade decisions
• Some downsides of technical indicators is a cluttered price chart and false buy and sell signals
• Leading and lagging indicators are classified based on their placement relative to the price chart and the speed at which they generate signals. Leading indicators are predictive, lagging indicators follow price action and make visualization better

Different types of indicators

Trading conditions often change from trending to ranging, from calm to volatile markets. There’s no single indicator that works in every condition. Which is why traders are looking for FX indicators that work well together. There are indicators that measure different things:

• Trend indicators – Trends are observable price movements over an extended period of time. Trend indicators measure trend direction. When the price is increasing, an uptrend forms. When the price is decreasing, a downtrend forms
• Volume indicators – Volume refers to the amount of an asset traded over a period of time. Volume indicators are used to gauge whether a trend is likely to last
• Momentum indicators – Momentum is the speed of price change. Momentum indicators measure speed, which can be useful in finding alternating trends
• Volatility indicators – Volatility shows the degree of price movements over time. High volatility leads to rapid price changes. Volatility indicators are used to measure price ranges to identify periods of high volatility

Awesome Oscillator & fractals

Now let’s take a look at some Forex indicators that work well together examples. The awesome oscillator and fractals are used together to identify the support and resistance boundaries of trends. Traders use them in combination to find reliable entry points by measuring the distance between the histogram bars of the awesome oscillator and zero lines.

Awesome Oscillator definition and calculation

• Indicator type: Leading indicator
• Timeframe: 34 and 5-day simple moving averages
• Placed: Below the chart

The Awesome Oscillator is a momentum indicator that helps traders identify potential trend reversals by comparing two simple moving averages of short and longer periods (typically 5 and 34-day SMAs).

To calculate the awesome oscillator, the first step is to find the 5-day and 34-day SMAs:

SMA = (High price + Low price)/2

Where the highs and lows are separate for the 34 and 5-day averages, respectively.

Awesome oscillator = 5-period SMA – 34-period SMA

After that, the awesome oscillator can be placed on a histogram, where the centerline value is 0.

Fractal definition and calculation

• Indicator type: Lagging indicator
• Timeframe: 1-hour, or 15-minute (can be used on other timeframes as well)
• Placed: Below the chart

Fractals consist of five bars and are used to identify possible trend changes on the market.

• A bullish fractal can be seen when a low candle is wedged between two higher low candles. Bullish fractals have a shape that resembles the letter “U”, or “V”
• A bearish fractal can be seen when a high candle is wedged between two lower highs. Bearish fractals are shaped like upside down bullish fractals

Fractal formula and calculation steps:

Bearish fractal =

• High (N) > High (N – 2)
• High (N) > High (N – 1)
• High (N) > High (N + 1)
• High (N) > High (N + 2)

Bullish fractal =

• Low (N) < Low (N – 2)
• Low (N) < Low (N – 1)
• Low (N) < Low (N + 1)
• Low (N) < Low (N + 2)

Where:

N = High/Low of the current candle

N – 2 = High/Low of the candle two periods to the left of N

N – 1 = High/Low of the candle, one period to the left of N

N +1 = High/Low of the candle, one period to the right of N

N+ 2 = High/Low of the candle two periods to the right of N

How to calculate the fractal:

• Find the N point on the chart
• If there are two lower high points to the left of the high, or two higher lows to the left of the low, this could be a pattern
• If two lower highs follow the high, a bearish fractal is complete. And when two higher lows follow the low, a bullish fractal is complete

Example of AO and fractals in forex

When trading with the Awesome Oscillator (below the chart), traders can apply fractals (on the chart) to find trend and breaking points on the AO. For example, bullish fractals coinciding with an uptick in AO value could help confirm the bullish signal sent out by the fractal indicator.

MACD & Stochastic

It’s hard to spot the indicators that work well together in FX, however MACD and stochastic oscillators can count as an example.

MACD definition and calculation

• Indicator type: Lagging indicator
• Placed: Below the chart
• Timeframe: 12 and 26-period EMAs

The MACD is a trend momentum indicator that depicts the relationship between two exponential moving averages. MACD is used to generate overbought and oversold signals, Crossover and divergence strategies are used to generate bullish and bearish signals on the MACD curve.

To calculate the MACD, we must first find the 12 and 26-period EMAs:.

EMA = Price(T) x K + EMA(Y) x (1-K)

Where:

T = price today

Y = yesterday’s EMA

K = 2/(N+1)

N = number of days in the EMA

MACD = 12-period EMA – 26-period EMA

Stochastic oscillator definition and calculation

• Indicator type: Leading indicator
• Placed: Below the chart
• Timeframe: 14 periods

The Stochastic Oscillator compares the closing prices of an asset to a range of prices over a 14-period timeframe. The indicator measures price momentum on a scale of 0 to 100. Prices tend to overextend, and the Stochastic Oscillator shows these areas on the chart.

The Stochastic Oscillator formula:

%K = ((C – L14) / (H14 – L14)) X 100

Where:

%K = current value of the stochastic indicator

C = Recent closing price

L14 = the lowest price over the last 14 trading sessions

H14 = the highest price over the last 14 trading sessions

The %K figure is often referred to as the fast stochastic oscillator. To calculate the slow stochastic oscillator, or %D, calculate the 3-period moving average of %K.

Example of MACD and stochastic oscillator in forex

When the stochastic value reaches 100 and starts heading downward, this is a sell signal. When the stochastic drops to a near-zero value – this is a buy signal.

The Double-Cross strategy integrates the MACD with the stochastic. This is how the strategy typically works:

• When the Stochastic crosses the 50 centerline just before the MACD, this can be a buy signal with decent room for upside
• In an ideal scenario, the double-cross happens below the centerline so that there is significant room for further upward movement for the two indicators

RSI & EMAs

Another example of FX trading indicators that work well together are The Relative Strength Index RSI and Exponential Moving Average EMA.

RSI definition and calculation

• Indicator type: Lagging indicator
• Placed: Below the chart
• Timeframe: 14 periods

The RSI is a momentum indicator that measures trend strength and possible reversals. The indicator shows the speed and change of price movements and assigns a value of 0 to 100.

The RSI value above 70 represents an overbought signal, while a value below 30 is considered oversold. The 40-50 and 50-60 values are often used as support and resistance levels for the RSI.

RSI calculation:

RSI = 100–100/((1+(Average gain/Average loss))

The first formula uses positive values for gains and losses, which represent the percentage gains and losses over the previous periods. Periods of gain are input as zero in the average loss.

RSI = 100 – [100/(1+((Previous Average Gain X 13) + Current Gain) / ((Previous Average Loss X 13) + Current Loss))

EMA definition and calculation

• Indicator type: Lagging indicator
• Placed: On the chart
• Timeframe: 10, 50, 100, 200 periods

An exponential moving average is a category of moving averages that places a greater weight on the most recent price points. EMA crossovers and divergences generate buy and sell signals for traders.

The shorter the timeframe, the closer an EMA follows the price chart.

EMAs are most suited for trending markets with distinct breakouts and reversals.

To calculate an exponential moving average, traders need to have the following data available to them:

• The current price of the asset at the point of calculation
• The EMA from the previous day
• The timeframe for the EMA
• A multiplier (which is commonly set at 2)

Once we have this information, we can move on to the formula, which is as follows:

EMA = Price(T) x K + EMA(Y) x (1-K)

Where:

T = price today

Y = yesterday’s EMA

K = 2/(N+1)

N = number of days in the EMA

Fibonacci & trendlines

Fibonacci retracement levels and common trendlines are often used together to find support and resistance levels in trading. When selecting Forex trading indicators that work well together, it’s important to note that each indicator is made for identifying a certain condition. If your trading strategies are based on trading significant levels, Fibonacci retracements and trendlines are a great combination.

Fibonacci definition and calculation

• Indicator type:
• Placed: On the chart
• Timeframe: 5 minutes

Fibonacci retracement levels connect two relevant price points on a chart. The Fibonacci percentage ratios of 23.6%, 38.2%, 50%, 61.8%, and 78.6% are all areas where the price could reverse, or slow down. However, reaching Fibonacci levels does not guarantee a reversal by any means.

Trendlines definition

• Trendlines connect price points on a curve
• Trendlines applied to highs and lows can create channels
• Timeframes used for trendlines vary from trader to trader
• Simple trendlines are plotted on the price chart and show trend formations

Example of Fibonacci and trendlines in forex

Simple trendlines used with Fibonacci retracement levels can help traders identify the retracement levels with a higher likelihood of a reversal. When Fibonacci levels coincide with the crossovers between the price and the trendline can be a stronger signal than retracement levels on their own.

Bollinger Bands® & BandWidth

BandWidth is an indicator derived from Bollinger Bands. The two indicators used together show the Bollinger Bands and the percentage difference between the upper and lower bands to clearly show whether the bands are contracting or expanding and to what degree.

Bollinger Bands definition and calculation

• Indicator type: Lagging indicator
• Placed: On the chart
• Timeframe: 20-day EMAs (variable timeframes)

Bollinger Bands are composed of trendlines, which are plotted two standard deviations apart from a simple moving average of an asset’s price. The bands expand or contract based on the volatility of the asset.

Bollinger Bands formula:

BOLU = MA (TP, n) + m * σ [TP, n]

BOLD = MA (TP, n) – m * σ [TP, n]

Where:

BOLU = the upper Bollinger Band

BOLD = the lower Bollinger Band

MA = moving average

TP = typical price = (High + Low + Close)/3

N = number of days in smoothing period (20)

M = number of standard deviations (2)

σ [TP, n] = the standard deviation over last n periods of TP

BandWidth definition and calculation

• The Bollinger BandWidth tracks the width of Bollinger Bands by a percentage point
• BandWidth is useful to correctly identify expansions and contractions of Bollinger Bands
• Rising BandWidth shows increased volatility, and vice versa

Bollinger BandWidth calculation:

Band Width = (Upper Bollinger Band – Lower Bollinger Band) / Middle Bollinger Band

Example of Bollinger Bands and BandWidth in forex

Applying BandWidth to Bollinger Bands makes it easier to identify squeeze signals.

• During high volatility, the bands will widen, while they would contract during low volatility
• When there is significant distance between the band, it can indicate lower volatility and the end of a trend. When the distance is narrow, this can indicate a significant move in either direction

Keltner channels & ATR

Keltner channels use the Average True Range to show trend continuations. When the ATR breaks above or below the Keltner channels, this indicates a continuation.

Keltner channel definition and calculation

• Indicator type: Lagging indicator
• Placed: On the chart
• Timeframe: 20-period EMA

Keltner channels use the ATR to measure volatility. When the ATR breaks above the Keltner channel, this shows a continuing uptrend. The bands are usually placed at two times the ATR above and below the EMA.

The price reaching the upper Keltner channel is a bullish signal, and vice versa. Upper and lower Keltner bands serve as support and resistance levels.

Keltner channel calculation:

Keltner Channel Middle Line = EMA

Keltner Channel Upper Band = EMA+2*ATR

Keltner Channel Lower Band = EMA−2*ATR

where:

EMA = Exponential moving average (typically over 20 periods)

ATR = Average True Range (typically over 10 or 20 periods)

The below steps describe the process of calculating Keltner channels:

• Find the desired period EMA (typically 20 periods)
• Calculate the desired period ATR (typically 20 periods)
• Multiply the ATR by your multiplier of choice (typically 2) and subtract the number from the EMA (this is the lower band value)
• Multiply the ATR by your multiplier of choice (typically 2) and add the number to the EMA (this is the upper band value)
• Repeat these steps for each period of the EMA

ATR definition and calculation

• Indicator type: Lagging indicator
• Placed: Below the chart
• Timeframe: 14 periods

Average true range uses absolute values of current and previous closing prices to find a simple moving average. A pair experiencing high volatility will have a high ATR, and vice versa.

ATR measures volatility and not the direction of a pair’s price.

To calculate the average true range, let’s look at the formula below:

TR=Max[(H − L), Abs(H − CP), Abs(L − CP)]

ATR=(1 / n) (i=1)∑ (n) TR(i)

Where:

TR(i) = A particular true range

N = The time period employed

If a trader wants to use a 10-day timeframe, they will have to calculate:

• The maximum of the absolute value of the current high – the current low
• The absolute value of the current high – the previous close
• The absolute value of the current low – the previous close

The same would be done for the 10 recent trading days, which are then averaged to find the first 10 values of the ATR.

Example of Keltner channels and ATR in forex

Keltner channel width is determined by the ATR. When the ATR spikes, the Keltner channels widen, and vice versa. ATR can also show where channel breakouts are likely to happen. When the channel tightens, the price is likely to have a breakout, and the ATR value goes down.

FAQs on indicators that go well together

Are forex indicators that work well together any good?

Forex indicators that are used in combination are often used as such to mitigate the flaws associated with each. Identifying the relationship between key metrics such as trend and volatility, volume and price are important for traders that wish to generate reliable market entry and exit signals.

Are forex indicators that work well together safe?

When traders use different technical indicators on the same chart, this allows them to take advantage of the most effective features of each indicator. A possible downside to this is cluttering the price chart with too many indicators, which can render them ineffective.

Can forex indicators that work well together get you profits?

Using multiple indicators can help traders mitigate some risk associated with each of them, thus reducing the downside to the trader’s funds. Effective indicator combinations can not only lead to profits, but also protect trades from the bulk of the risk associated with Forex technical trading.