What is an indicator? 15 technical analysis tools that traders in Forex and the stock market cannot ignore

In the journey to become a professional trader, understanding what indicators are and how to utilize them is a decisive factor for success. Many new traders entering the market often feel confused when looking at price charts, unsure of the right timing to enter or exit trades. For this reason, technical analysis tools were created and have become invaluable assistants, helping traders proactively identify trading signals.

Foundations of Technical Analysis: Three Core Components

Technical analysis is built on three main pillars: market trend, chart structure, and technical indicator systems. Among these, technical indicators are a collection of tools developed over decades by traders and statisticians.

Today, thanks to technological advancements, technical indicators are automatically calculated across all modern trading platforms, providing traders with real-time information and enabling quick trading decisions. The four main types of indicators widely used are: trend, momentum, volatility, and volume indicators.

Trend Indicator Group: Determining Price Direction

Moving Average (Moving Average - MA) is one of the oldest yet still popular tools. By calculating the closing prices over a specific period, MA shows whether the price is trending upward or downward. However, MA does not predict exact prices; it reflects how the trend is forming.

ADX (Directional Average) helps traders identify whether the market is in a clear trend and measures the strength of that trend. The unique feature of ADX is that it operates independently of price direction — the ADX line can rise even when prices are falling. This valuable information helps decide whether to participate in the market or wait further.

Ichimoku Cloud (Ichimoku Kinko Hyo) is a comprehensive indicator composed of five elements (Tenkan-sen, Kijun-sen, Senkou span A, Senkou span B, Chikou span). It provides information about support and resistance zones and also determines the strength of the current trend.

MACD (Moving Average Convergence Divergence) is formed from two moving averages, allowing traders to monitor changes in momentum, direction, and timing of price movements. MACD is especially useful for warning of upcoming trend reversals.

Parabolic SAR indicator helps traders precisely identify when to buy, sell, or set stop-loss orders by tracking potential price reversal points.

Momentum Indicator Group: Measuring Market Strength

RSI (Relative Strength Index) oscillates between 0 and 100, reflecting the asset’s strength relative to its past prices. RSI is often used in conjunction with other indicators to confirm stronger trading signals.

Stochastic Oscillator (SO) compares the closing price to the price range over a period, revealing when an asset is overbought (SO > 80) or oversold (SO < 20). SO also helps detect reversal signals.

Williams %R operates similarly to SO but with a reversal ratio, helping traders identify when an asset reaches overbought or oversold levels.

Volatility Indicator Group: Assessing Price Fluctuations

ATR (Average True Range) measures market volatility with a single line. It helps traders determine entry and exit points based on current volatility levels.

Bollinger Bands (Bollinger Band - BB) are constructed around a simple moving average, forming upper and lower bands. When prices touch the upper band, the market is often overbought; touching the lower band indicates oversold conditions. BB is often combined with MACD and RSI for stronger signals.

Standard Deviation (Standard Deviation - SD) measures the deviation between current prices and the moving average. High SD indicates strong market volatility and potential consolidation phase. Traders use SD to find suitable entry points.

Volume Indicator Group: Confirming Trend Strength

MFI (Money Flow Index) combines price and volume to determine whether an asset is overbought or oversold and to observe trend changes. MFI ranges from 0 to 100 and is often used with Elliott Wave and Fibonacci analysis.

A/D (Accumulation/Distribution) shows whether an asset is being accumulated or distributed based on volume and high-low price differences. When prices rise but A/D declines, it may indicate insufficient buying volume supporting the move, signaling a potential reversal.

OBV (On-Balance Volume) assesses buying and selling pressure based on volume. When prices increase, OBV today equals yesterday’s OBV plus volume; when prices decrease, OBV equals yesterday’s OBV minus volume. Rising OBV indicates investor interest in the asset.

Effective Indicator Combination Strategies: Practical Trading Approaches

Understanding each indicator individually is the first step; the next is knowing how to combine them appropriately. Here is an example of a buy strategy using four indicators: RSI, Ichimoku Cloud, Bollinger Bands, and OBV.

Step 1: Confirm price breaks above the middle Bollinger Band

A buy order begins when the price breaks and closes above the middle Bollinger Band. This is a preliminary signal of momentum change.

Step 2: Wait for RSI to cross above 50

If RSI has not yet crossed 50, wait. RSI above 50 indicates increasing positive momentum. Note that RSI does not always rise simultaneously with price crossing the middle BB, so patience is key until both conditions are met.

Step 3: Look for volume confirmation via OBV

Before entering, check if OBV is rising. Increasing volume confirms genuine buying support for the price movement, not just a price move without backing.

Step 4: Set stop-loss below the lower Bollinger Band

Place stop-loss just below the lower Bollinger Band. Setting it too high may lock in unnecessary losses; too low may cause significant losses if the market reverses.

Step 5: Take profit when reversal signals appear

To avoid waiting too long and losing accumulated profits, close the position when the price breaks below the lower Bollinger Band. This indicates a likely trend reversal.

For a SELL trade, you can apply the same strategy but in reverse.

Important Notes When Using Indicators

Indicators are not perfect: They can sometimes give false signals, especially in unusual market conditions. That’s why combining multiple indicators from different groups is essential.

Bollinger Bands and Ichimoku Cloud are versatile tools: These indicators can be used independently in specific strategies due to the comprehensive information they provide.

Volume indicators serve as confirmation: They should not be used alone but in conjunction with other indicators to verify the true strength of a trend.

Conclusion

What are technical indicators is not just a theoretical question but an essential foundation for any trading strategy. Mastering how to use indicators gives traders a clear advantage in the Forex and stock markets, while also increasing safety for each trade.

However, proficiency with indicators does not happen overnight; it requires continuous practice and testing across various market conditions. Only then can traders combine them harmoniously and effectively.