Trader's main task is to determine the point of entry and exit from the market. Actually, all indicators are meant to help them cope with this task. But not all indicators can be used for direct entry into the market, and some of them are only intended for general market analysis.
In the conventional classification of indicators, they are divided into 3 categories (trend indicators, oscillators, and psychological ones). An alternative option can be offered, dividing all the analytical tools into 2 groups: indicators of entry into the Forex market and the category of auxiliary instruments.
The main characteristic of the work of each indicator is how effectively it determines the point of entry and exit from the market. Stability and profitability of the trading system depends on this. However, the effectiveness of the indicator also depends on the optimization of the parameters selected, that is, on the work of the trader. Therefore, when analyzing the effectiveness of the selected tool, it is desirable to know the algorithm of its work.
Popular indicators of entry into the Forex market
The indicators of entry into the Forex market include both well-known, time-tested tools and any third-party developments that give a clear signal to make a deal. Of course, the effectiveness of various Forex indicators may differ significantly.
Stochastic Oscillator can be regarded as an example of an indicator to search for points of entry into the market. The signal to make a deal can be a situation where the two indicator lines are in oversold/overbought area and the fast line of the oscillator crosses the slow one.
In order to effectively trade with it, you must remember that Stochastic is recommended to use only when the price moves in a horizontal corridor (during the flat). During the trend, both lines of the oscillator can permanently “freeze” in oversold/overbought areas, generating false alarms.
So we can assume that the Stochastic is the indicator of entry into the market during the flat or the one that helps determine the completion of the correction after the trend movement. For example, it can’t help determine a trend reversal. But there are universal indicators that may be used in any situation.
Indicators of the entry into the market of the trend group
Indicators of the entry into the market of this group give quite a clear signal to make a deal. Moving Averages is one of the most popular trend indicators, the MA set is most commonly used – in this case, the signal to enter the market is when the “fast” moving average crosses the “slow” one.
There is also another option of using MA – as the boundary of the channel within which the price moves. In this case, the moving averages are shifted vertically by a particular value. Trading in this case is carried out on the rebound from the boundary of the channel (or a breakdown). The price chart touching the boundary of the channel is the signal to enter the market.
In addition, the moving averages can act as a base for other indicators. For example, AO and AC indicators look like a histogram, but their readings are calculated based on the MA at different time intervals. If the histogram of these indicators shows 2 successive green or red bars, it can be regarded as a signal to start trading.
Despite the similar appearance, these algorithms are different indicators: AC is considered to be more sensitive to price fluctuations. Therefore, you should carefully use it on smaller timeframes – it can generate many false alarms.
Arrow indicators: benchmark of the indicators of accurate entry
Indicators of accurate entry into the Forex market include such a category of analytical tools as arrow indicators. Despite the sophisticated analytical algorithm, the trader sees only the arrows on the chart that indicate the direction in which it is better to enter the market. Additional constructions are absent.
Volume indicators for the most part also cannot be considered as indicators of accurate entry – this is why they are rarely used in trading. Their main purpose is the overall analysis of the market, their readings can only estimate who dominates at the moment: the bulls or the bears.
But this rule has exceptions. For example, Better Volume indicator can be used to make deals. To do so, the creators of the indicator introduced the analysis of the correlation of the candle configuration and the money supply from marketmakers in the market into its algorithm. For the ease of use, the histogram bars are painted in different colors depending on the situation.
However, not all indicators are equally useful. Some tools are used only as an auxiliary element in trading systems. For example, the Fractal standard indicator can be used to build channels, but it is rarely used to make deals.
Indicators of the entry into the Forex market as the basis of the trading system
Proper use of indicators will improve any trading system, but it is undesirable to make deals only on the basis of the indicator signals. It must be remembered that the strategy is primary, and the indicator is only one of its constituent parts.
The set of indicators depends on the trading style of the trader. If preference is given to the technical or wave analysis, 1 or 2 indicators are enough. Their signals will be of minor importance and only confirm a signal to make a deal.
If the business strategy is build fully on indicators, you should approach the choice of instruments more responsibly. You need to follow a few rules of selection of indicators:
- don’t use more than 3-4 indicators at the same time. In such a situation confusion in signals is inevitable and stable lucrative trading becomes impossible;
- volume indicators can be excluded from the set of indicators;
- use only the indicators with a well-known algorithm.
In general, the indicators of entry into the Forex market can greatly facilitate trading. Following the indicator signals, the trader will get rid of doubt when making the deal. Besides, such indicators normally provide good visibility. But at this point, you should be careful and use only proven Forex indicators.