How to interpret forex? Master these 10 trading technical indicators to understand market trends

Trading in the forex market, the biggest fear is guessing blindly. To truly master the market, you need to understand how to use technical indicators to “read charts.” Simply put, technical indicators are numerical tools calculated based on historical price and volume data, helping you identify market trends, strength, and volatility, providing quantitative basis for trading decisions.

The Four Major Categories of Technical Indicators

Traders commonly use technical indicators divided into four categories:

• Trend Indicators: Help you determine the direction of price movement
• Momentum Indicators: Measure the strength of the trend
• Volatility Indicators: Assess the magnitude of price fluctuations
• Volume Indicators: Observe market participation

Interestingly, the concept of technical indicators dates back to the 17th century. Japanese rice merchant Honma Munekyu invented candlestick charts, which are considered the origin of modern technical analysis.

Top 10 Essential Indicators Explained

1. Moving Averages (MA) — The Most Basic Trend Following Tool

How to read forex charts? Start with moving averages. They are the most commonly used trend indicators, calculated by averaging prices over a certain period, helping you filter out market noise and see the true trend direction.

Common periods include 5, 20, 50, 100, and 200 days. For example, a 5MA is the average closing price over the past 5 trading days.

Simple method to judge trend:

Price above the moving average → Uptrend; price below → Downtrend.

For more precise turning points, use the crossover method: when a short-term MA (like 5-day) crosses above a long-term MA (like 20-day), it’s a “golden cross” (bullish signal); crossing below is a “death cross” (bearish signal).

MA also has various forms:

• Simple Moving Average (SMA)
• Exponential Moving Average (EMA)
• Weighted Moving Average (WMA)
• Volume Weighted Moving Average (VWMA)

The advantage of moving averages is their applicability across any timeframe and market, whether forex, stocks, or cryptocurrencies.

2. Relative Strength Index (RSI) — The Warning Light for Overbought and Oversold Conditions

RSI is a popular momentum indicator, fluctuating between 0 and 100, typically set to a 14-day period.

Quick interpretation of RSI:

• RSI > 70: Overheated market, possible top and correction
• RSI < 30: Oversold market, potential rebound
• RSI > 50: Bullish trend
• RSI < 50: Bearish trend

Note that RSI can give false signals in strong trending markets, often remaining in overbought or oversold zones for extended periods. It also has a lagging nature, reacting less swiftly to rapid price changes.

3. Stochastic Oscillator (KD) — A Sensitive Radar for Short-term Trading

The stochastic oscillator consists of %K and %D lines, where %K reflects current momentum, and %D is the moving average of %K.

Application rules:

• Indicator > 80: Overbought zone, possible correction
• Indicator < 20: Oversold zone, possible rebound
• %K crossing below %D from above 80 → Sell signal
• %K crossing above %D from below 20 → Buy signal

The stochastic oscillator’s strength lies in fast response, with %K quickly tracking price changes, making it especially suitable for short-term trading.

4. Bollinger Bands (BB) — Visual Window of Volatility

Bollinger Bands plot a channel with three lines on the chart:

• Middle Band: 20-day simple moving average, representing the average price
• Upper Band: Middle band plus 2 standard deviations, acting as resistance
• Lower Band: Middle band minus 2 standard deviations, acting as support

Two main uses of Bollinger Bands:

1. Identify overbought/oversold: Price near upper band indicates overbought; near lower band indicates oversold
2. Warn of volatility changes:
   • Widening bands → Increased volatility, trend acceleration
   • Narrowing bands → Reduced volatility, consolidation approaching breakout
   • Extreme compression → Sign of large upcoming movement, potential breakout opportunity

Bollinger Bands uniquely combine volatility measurement and trend recognition, offering traders flexible reference points.

5. MACD (Moving Average Convergence Divergence) — A Fusion of Trend and Momentum

MACD consists of three parts:

1. DIF Line (Fast line): 12-day EMA minus 26-day EMA
2. DEA Line (Signal line): 9-day EMA of DIF, used as a trigger
3. Histogram: Difference between DIF and DEA, visualizing the gap

How to interpret MACD signals:

• DIF crossing above DEA → Bullish signal
• DIF crossing below DEA → Bearish signal
• Histogram above zero and red → Uptrend in progress
• Histogram below zero and green → Downtrend in progress

Watch for divergence: If prices make new highs but MACD forms lower highs (bearish divergence), or prices make new lows but MACD forms higher lows (bullish divergence), it may signal trend reversal.

MACD is easy to understand and rich in information, often combined with RSI and Bollinger Bands for more reliable signals.

6. Divergence Rate (BIAS) — The Mean Reversion Hunter

BIAS is based on the “mean reversion” theory, assuming prices will eventually return to the moving average.

• Positive value: Price above MA, overbought, possible correction
• Negative value: Price below MA, oversold, possible rebound

Its advantage is simplicity and intuitiveness, providing early warning of reversals and helping traders adjust strategies promptly.

7. Average True Range (ATR) — Quantifier of Volatility

Developed by technical analyst Welles Wilder, ATR measures the average range of price movements over a period.

Practical application of ATR:

• High ATR → Market with large volatility, wider price swings, adjust stop-loss and targets accordingly
• Low ATR → Calm market, small price movements, tighten stop-loss and targets

ATR helps traders manage risk based on current market volatility.

8. Volume (VOL) — The Weather Vane of Market Participation

Volume reflects how many traders are participating in the market.

Significance of volume:

• High volume: High market participation, more reliable price movements
• Low volume: Quiet market, less support for price moves

Volume and price relationship:

9. Ichimoku Kinko Hyo — Japan’s “All-in-One” Indicator

Developed by a Japanese journalist in the late 1930s, meaning “at a glance balanced chart.”

Ichimoku consists of five lines and a cloud (Kumo):

1. Tenkan-sen (Conversion Line): 9-period MA, reflects short-term trend
2. Kijun-sen (Base Line): 26-period MA, reflects medium-term trend
3. Senkou Span A (Leading Span A): Midpoint of Tenkan-sen and Kijun-sen, projected 26 periods ahead as support/resistance
4. Senkou Span B (Leading Span B): 52-period MA, projected 26 periods ahead
5. Chikou Span (Lagging Line): Today’s closing price plotted 26 periods back, confirms trend
6. Kumo (Cloud): Area between Senkou Span A and B

Usage tips:

• Price above the cloud → Uptrend
• Price below the cloud → Downtrend
• Thick cloud → Strong support/resistance
• Thin cloud → Weak support/resistance
• Conversion line crossing above base line with price above cloud → Buy signal

Ichimoku’s comprehensiveness is its strength, but it’s complex; beginners need time to learn.

10. Fibonacci Retracement — Application of the Natural Number Sequence in Trading

Fibonacci retracement is not just an indicator but a technical analysis tool based on the Fibonacci sequence—a mathematical pattern prevalent in nature (like tree branches, shells).

Method: select two points (usually high and low), and the tool automatically generates retracement levels at 23.6%, 38.2%, 50%, 61.8%, and 100%.

Trading logic:

• Draw from high to low in a downtrend → consider selling when price hits Fibonacci levels
• Draw from low to high in an uptrend → consider buying at Fibonacci levels

Note that different high-low selections produce different levels, so choosing key points carefully is essential.

Indicator Quick Reference Table

Golden Rules for Using Indicators

In forex trading, relying on a single indicator is risky. The market is a complex, dynamic system; any single indicator can give false signals.

Key recommendations:

• Indicators are auxiliary tools, not crystal balls
• Confirm signals with multiple indicators for reliability
• Combine moving averages + MACD + RSI to build your own trading system
• Adjust indicator parameters according to different market environments

For beginners, it’s advisable to practice on demo accounts, testing various indicator combinations risk-free, to find what suits your trading style. Through repeated practice, you will gradually learn how to flexibly apply these technical indicators in real markets.

Trading requires experience and skill accumulation; indicators are just aids. Ultimately, success depends on your trading discipline and risk management awareness.