Top 20 trading indicators to master the markets

Navigating financial markets requires a solid grasp of technical indicators, the cornerstone of any effective trading strategy. These indicators serve as the compass for traders, providing insights into price movement, trend direction, and potential turning points by analyzing historical data. In the quest for market mastery, technical analysis tools are invaluable in deciphering the nuances of a security's price trajectory. 

This comprehensive guide presents the Top 20 technical indicators that seasoned traders rely on, illuminating how these instruments can sharpen your trading acumen and enhance your ability to predict market movements. And, because we always like to go the extra mile, we’ve added a few extra trading indicators that we think are worth exploring.

Join us as we break down the essentials, helping you understand trading indicators and how to use them skillfully in your trading endeavors.

1. What is technical analysis?
2. What are technical indicators?
3. Types of indicators for technical analysis.
4. 20+ most popular technical indicators for trading.
5. How do technical indicators work?
6. How many indicators should a trader use at a time?
7. Is there a short list of the best technical indicators for beginner traders?
8. What are the best forex trading indicators?
9. Are trading indicators reliable?

What is technical analysis?

Technical analysis is a method of studying and evaluating financial markets by analyzing historical price patterns and trends of trading instruments like currencies or commodities. It is used to predict future price trends based on the idea that market sentiment and trader behavior tend to repeat themselves over time. 

To carry out a technical analysis, traders use a variety of technical indicators and tools such as charts and mathematical calculations. These tools help traders develop a trading strategy by identifying the best entry and exit points for trades. The MetaTrader 4 platform is an example of software that provides the essential and necessary technical analysis tools required for this type of analysis.

What are technical indicators?

Technical indicators are instrumental analytical tools for traders who want to understand the price trend of stocks, currencies, or other assets. Think of them as special clues hidden in market data that can signal whether the current trend will continue or make a U-turn. These indicators use past price trends and numbers from price charts to guess future price movements, helping traders make smart decisions about when to open or close a position. 

The efficacy of some of these technical analysis indicators stems from their ability to parse through large quantities of market data, including price charts, to generate buy and sell signals. By analyzing historical performance and comparing it to current conditions, technical indicators can show potential changes in an asset's momentum or volatility, thus indicating whether an ongoing price trend is likely to persist or reverse.

In professional trading, these tools are regarded as indispensable for their mathematical precision and the objectivity they bring to analyzing market dynamics. Some of the best technical analysis indicators are classified into two categories: leading indicators, which provide predictive signals before a price movement occurs, and lagging indicators, which confirm the trend direction after the price moves. 

Types of indicators for technical analysis

As mentioned, there are two categories of indicators: leading indicators and lagging indicators. However, they can also be categorized by five types of indicators.

Trend indicators: Tools for identifying market direction

Trend indicators are essential for traders aiming to capitalize on price movements, whether ascending or descending. Embracing the adage 'the trend is your friend', these technical indicators reveal the trend's direction and confirm its presence. One fundamental technical indicator is the moving average (MA), which smooths out price fluctuations on a price chart, providing clarity on whether a currency pair is trending upwards, downwards, or sideways. With options like the simple moving average (SMA) and exponential moving average (EMA), traders can choose the average indicator that best aligns with their strategy.

Another trend-following leading indicator, the Ichimoku Kinko Hyo, may seem intricate at first glance but offers a straightforward analysis of current trends, support/resistance levels, and trend reversals. The average direction index (ADX), though not specifying the price trend's direction, distinguishes between trending and ranging conditions, ensuring trades align with prevailing market dynamics.

Trend traders also employ the parabolic SAR for its capacity to track prices as trends develop over time, providing a visual cue for potential reversals. Besides these, technical indicators like the moving average convergence divergence (MACD) and relative strength index (RSI) serve as crucial tools to forecast future price movements, allowing traders to anticipate and strategize accordingly. With adept use of these trend indicators, traders can harness insights into future price movements, optimizing their trade decisions.

Volume indicators: For confirming trend strength and reversals

Volume indicators play a critical role in technical analysis by confirming trend strength and potentially signaling reversals. Expert traders frequently integrate tools such as the on balance volume (OBV) indicator and the volume weighted average price (VWAP) to assess the market's conviction behind price movements. The on-balance volume merges trading volume and price changes to offer insights into the overall direction of an asset’s accumulation or distribution. It's a cornerstone among trading indicators, enabling informed trading decisions by revealing momentum that may not be apparent through price alone.

Other technical indicators, like the force index, accumulation distribution, Chaikin oscillator, money flow index, and Chaikin money flow, also correlate trading volume with price variations, further aiding traders in evaluating the robustness of current trends.

Momentum indicators: For gauging market momentum

Momentum indicators are a critical tool for traders who aim to make informed predictions about future market movements. Unlike most trading indicators, momentum indicators are leading rather than lagging indicators, providing insight into trends and potential reversals. They help assess if a trend is gaining or losing strength and whether an asset is overbought or oversold based on historical data, which can signal a potential change in direction. By employing momentum indicators, traders can fine-tune their forecasting abilities and enhance their chances at profitable trading. Among these useful tools, the Stochastic oscillator, moving average convergence divergence (MACD), relative strength index (RSI), and commodity channel index (CCI) are particularly effective and user-friendly for gauging market momentum. These momentum indicators offer unique perspectives and calculations to determine market entry and exit points, allowing traders to position their trades strategically.

Volatility indicators: For assessing the magnitude of price shifts

Volatility indicators play a key role in technical analysis, helping traders gauge the magnitude of price movements of an asset. An asset exhibiting large swings is deemed highly volatile, whereas less dramatic shifts point to low volatility. Understanding volatility is crucial for traders before entering a trade, as it influences the trade size and the setting of stop and limit levels. 

Among the most prominent technical indicators for volatility is the Bollinger bands (BB) indicator, which plots three lines on a chart, including a 20-period simple moving average flanked by bands that adjust to volatility, thus catering to different currency pair behaviors. The average true range (ATR) is another vital trading indicator, offering insights into the average price range over a set period and serving as a reliable measure of market volatility. Additionally, the standard deviation indicator provides traders with a means to assess potential volatility impacts by comparing current price fluctuations against historical price data. However, it does not predict price direction.

Support and resistance indicators: For identifying price levels

Support and resistance indicators are fundamental technical indicators used to identify price levels on a price chart where an asset is likely to encounter barriers that prevent the price from moving in a particular direction. Pivot Points, a vital tool in technical analysis, are calculated using high, low, and close prices from previous periods and serve as potential support and resistance levels that traders watch closely. Trendlines and channels, meanwhile, are drawn above and below recent price action to illustrate the boundaries of price movement over time, which can also act as support or resistance zones. 

Fibonacci retracements are another class of technical indicators that are highly regarded for their ability to forecast the extent of a market's move against the prevailing trend. They offer a visual representation of support and resistance levels that traders utilize for making strategic decisions on when to enter or exit trades.

20+ most popular technical indicators for trading

Now that we’ve covered the categories and types of trading indicators and got a brief overview of what some of these popular technical analysis tools can do to enhance your trading strategy and help guide your trading decisions, let’s unwrap each one to see how you can use them. 

1. Relative strength index (RSI) indicator

The relative strength index (RSI) is a pivotal technical indicator used to evaluate the momentum and trend strength of a market. Oscillating between 0 and 100, the RSI helps in identifying overbought or oversold conditions. A reading above 70 indicates potential overbought status, suggesting a price decline could be imminent, while a reading below 30 may signal an oversold market, hinting at a possible price rally. 

Divergences between RSI and price movements are also key sell signals, pointing to weakening trends that could reverse. Furthermore, RSI can serve to pinpoint support and resistance levels during different market trends, making it one of the essential trading indicators for strategic decision-making. As an expert trader, monitoring the relative strength index (RSI) is crucial for successful market analysis and trading execution.

2. Bollinger bands 

Bollinger bands are a popular technical analysis indicator employed to assess market volatility and price action. This technical indicator consists of three lines: The middle line reflects the 20-day simple moving average (SMA) of prices. In contrast, the outer lines represent the standard deviations that indicate the upper and lower trading bands. The bands expand and contract with the increase or decrease in volatility; narrower bands suggest low volatility, while wider bands indicate higher volatility. By observing the interaction between price and these bands, traders can interpret potential market moves and overbought or oversold situations. For instance, a price touching the upper band may signal an overbought condition, while contact with the lower band could indicate an oversold market. 

The ‘Bollinger bands squeeze’ is a notable phenomenon that hints at a forthcoming breakout in market activity. To enhance trade decision-making, Bollinger bands are often used in conjunction with other technical indicators like RSI and MACD, providing a more comprehensive market analysis and view of market dynamics.

3. Moving averages

Moving averages are fundamental technical indicators for traders looking to understand the sentiment of the market and price action. These technical indicator tools, particularly the 10, 20, 50, 100, and 200 moving averages, are crucial in pinpointing the direction of the ongoing trend. 

 A price climbing above a moving average typically signals an uptrend, suggesting bullish market sentiment. Conversely, when the price dips below the moving average, it often indicates a downtrend, reflecting bearish sentiment. Moving averages come in various forms, including simple moving average (SMA), exponential moving average (EMA), and weighted moving average (WMA), each offering a different perspective on market trends. By incorporating moving averages into their analysis, traders can make more informed decisions based on the comprehensive view these indicators provide.

4. Moving average convergence divergence (MACD)

Most traders recognize that the moving average convergence divergence (MACD) indicator is a pivotal technical indicator in assessing a price trend. This average convergence divergence tool scrutinizes the relationship between two moving averages of an asset's average price, offering insight into potential momentum shifts. 

The MACD line, central to this moving average indicator, is the result of subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. Overlaying this is the signal line, a 9-period EMA, which acts to refine price action signals. A bullish signal is indicated by the MACD line crossing above the signal line, suggesting an uptick in price trend. Conversely, a bearish signal is given when the MACD line falls below the signal line, hinting at a possible downward trend. Utilizing the MACD, traders can adeptly navigate the markets by identifying strategic entry and exit points based on the convergence and divergence of these moving averages.

5. Parabolic SAR

The Parabolic SAR indicator is a valuable technical indicator developed to gauge momentum shifts in price action. Renowned among traders for its effectiveness, this momentum indicator simplifies the identification of buy or sell signals through its distinctive placement of dots in relation to the price chart. 

Unlike conventional moving averages, it provides a more intuitive approach by highlighting when the closing price surpasses the trend channel, signaling a breakout or a break through the support levels. This technical indicator is not only instrumental in spotting trend changes but also serves as a dynamic guide for setting trailing stop-loss orders, ensuring traders can potentially maximize profits while safeguarding against potential market reversals.

6. Stochastic oscillator indicator

As a prominent technical indicator among traders, the Stochastic oscillator is a momentum indicator that gauges the closing price of a security relative to its price range over a specific time period. Expert traders interpret this indicator, which fluctuates between 0 to 100, to pinpoint overbought conditions above 70 and oversold conditions below 30. 

The Stochastic oscillator consists of two lines—the %K and the %D—that help determine potential buy and sell zones based on their positions relative to the centreline. Technical indicators like the Stochastic oscillator are essential tools for analyzing market trends, offering signals to buy or sell, and identifying bullish or bearish divergences in price movements, assisting traders in making informed decisions in various market scenarios.

7. Volume

Volume is one of the essential technical analysis tools traders use to confirm the strength or weakness of a market trend. It measures the amount of an asset traded within a given period. A rising volume accompanying an upward price movement solidifies the existing trend, signaling robust market conviction. Conversely, if the volume decreases while prices continue to climb, it may indicate a signal line of weakening momentum, suggesting potential trend reversal or consolidation. Volume indicators thus play a crucial role in validating price actions in the market.

8. Fibonacci retracement indicators

Fibonacci retracement indicators serve as essential technical tools for traders seeking to identify potential support and resistance zones, acting as a signal line for strategic entry and exit points within the market. Based on the pivotal Fibonacci numbers, these horizontal lines represent percentages such as 23.6%, 38.2%, 61.8%, and 78.6%, which mark how much of a prior trend has been retraced. Expert traders analyze these indicators to gain insights into overbought and oversold levels, aiding in the decision-making process for successful trading maneuvers.

9. On balance volume indicator (OBV)

The on balance volume indicator (OBV) is a momentum indicator favored by traders for its ability to use volume flow to predict the strength and potential direction of a trend. This technical indicator tallies up-volume on days when the closing price exceeds that of the previous session and down-volume when it falls below, creating a cumulative measure of trading momentum. An ascending OBV line signifies higher volumes accompanying price increases, while a descending OBV suggests larger volumes on down days, offering insights into the robustness of price movements. 

Traders scrutinize the OBV for confirmation of price trends and warning signs of possible reversals when inconsistencies between price and volume trends emerge. Despite its utility, traders are cautious, as the OBV, like all leading indicators, can sometimes generate false signals.

10. Money flow index (MFI)

The money flow index (MFI) is one of the most common technical indicators used by expert traders who want to gauge the momentum of money entering or exiting a market. Functioning as a volume-weighted relative strength index (RSI), the MFI expertly combines price action and trading volume to flag potential overbought and oversold conditions. With a scale ranging from 0 to 100, readings above 80 typically warn of overbought scenarios, whereas figures below 20 indicate possible oversold states. 

Traders pay close attention to divergences flagged by MFI, as these can foreshadow imminent shifts in price trends. The MFI's unique incorporation of volume sets it apart from the RSI, providing analysts with a more comprehensive view of market dynamics and earning it a reputation as a leading indicator for predicting future market movements.

11. Average directional index (ADI)

The average directional index (ADI) stands out among technical indicators, offering traders a quantifiable measure of the prevailing market trend's strength. This tool incorporates a system of two key components: The positive directional indicator (+DI) and the negative directional indicator (-DI), both of which were developed by Welles Wilder – a renowned creator of several technical indicators used for technical analysis. 

The average directional index itself fluctuates on a scale from 0 to 100, with readings above 20 signaling robust trends and those beneath indicating weaker trend conditions. By evaluating the interplay of +DI and -DI, the ADI helps traders discern the momentum of market trends and guides them in making informed decisions on whether to engage in long or short positions, or to stand aside until clearer trends emerge.

12. Commodity channel index (CCI)

The commodity channel index (CCI) is a technical trading tool that functions as a momentum indicator, identifying when a market is overbought or oversold. Expert traders use CCI to measure how current asset prices compare to their historical average over a chosen period. When the CCI reading climbs above 100, it suggests that the asset's price is significantly higher than its average, indicating an overbought condition. Conversely, a CCI reading below -100 signals that the price is much lower than the average, pointing to an oversold state. These thresholds help traders determine bullish scenarios as the CCI moves up towards 100 or bearish ones when it descends towards -100.

13. Price volume trend indicator (PVT)

The price volume trend (PVT) indicator is a tool that traders use to gauge the equilibrium between demand and supply for an asset. It combines the percentage change in asset price to represent the relative supply or demand with the volume to quantify the momentum behind the price movements. PVT offers insights similar to the on balance volume (OBV) indicator, as both measure cumulative volume to assess the strength of an asset’s trend. This indicator aids in understanding the sentiment of the market and forecasting potential price changes based on prevailing volume trends.

14. Exponential moving average indicator (EMA)

The exponential moving average (EMA) is a crucial tool for traders, providing a nuanced view of market trends by emphasizing recent price data above older figures. Unlike the simple moving average (SMA), EMA responds more quickly to price changes, assigning greater weights to the latest data points during its calculation over a specific period. This characteristic makes the EMA a preferred indicator for many traders, as it offers clearer signals for detecting shifts in market direction and validating the persistence of ongoing trends. The EMA's focus on recent prices ensures that traders receive a timely and relevant analysis of price movements, which is essential for making informed trading decisions.

15. Volume weighted average price (VWAP)

The volume weighted average price (VWAP) provides traders with a more accurate reflection of a security's average trading value by incorporating the volume of trades at varying prices. VWAP stands out from basic average price calculations by considering not just the price but also the volume of trades, providing deeper insight into the market's behavior within a trading day. By using VWAP as a benchmark, traders aim to execute transactions in closer alignment with the day's average price, thereby optimizing their trading strategies. Moreover, VWAP is a valuable tool for assessing short-term market sentiment and understanding the overall direction and intrinsic value of an asset, making it an excellent tool for short-term trading strategies such as day trading and scalping.

16. Accumulation/Distribution line (A/D)

The Accumulation/Distribution line, commonly referred to as A/D, is a vital technical analysis tool used to gauge the money flow in or out of a security. It analyzes the volume of trading to ascertain if money is being accumulated (indicating buying pressure) or distributed (indicating selling pressure) in correlation with the security's closing price position within its daily range. A rising A/D line implies buying interest, reinforcing an uptrend, while a declining A/D line suggests selling interest, confirming a downtrend. Additionally, traders scrutinize divergences between the A/D line and price movement for early signs of potential trend reversals, making the A/D line a nuanced indicator for assessing market sentiment.

17. Ichimoku cloud

The Ichimoku cloud indicator is a comprehensive tool for technical analysis that provides a snapshot of a security's average price, allowing traders to swiftly gauge the current market sentiment. Composed of five different lines, it offers multiple angles on the price movement of an asset. The formation of the cloud itself comes from two key lines, Senkou Span A and Senkou Span B, which serve as a visual representation of market bias. Prices above the cloud suggest a bullish outlook, whereas prices below imply a bearish scenario. As an expert trader, the Ichimoku cloud is invaluable for making informed decisions by analyzing the market's prevailing mood with clarity and precision.

18. Standard deviation indicator

The standard deviation indicator is a statistical tool that measures the dispersion of data points. In trading, we use this indicator to assess market volatility: Wider bands suggest higher volatility, while narrower bands indicate a more stable market. By combining this volatility indicator with others, such as the mean and median, we can obtain a comprehensive view of an asset's price behavior, which is critical for making informed decisions.

19. Percentage price oscillator indicator (PPO)

The percentage price oscillator (PPO) is a trusted tool among expert traders for measuring momentum by calculating the percentage difference between two moving averages. This indicator provides a relative perspective similar to the MACD, but with an advantage because it uses percentage points. The PPO allows traders to compare momentum across different securities seamlessly, regardless of their price disparities. Its proportional values are essential for traders looking to analyze and act upon momentum trends in a straightforward and effective manner.

20. Williams percentage range (%R)

Williams percentage range, abbreviated as %R, is a momentum oscillator favored by experienced traders for identifying overbought or oversold conditions within the market. Functioning similarly to the Stochastic oscillator, it ranges between 0 and -100 to indicate these conditions. Readings above -20 suggest that an asset is in the overbought zone, while readings below -80 indicate an oversold condition. The %R calculates this by comparing the closing price of a security to its high-low range over a predetermined period, typically 14 periods. Traders often combine Williams %R with other technical indicators to increase the accuracy of their market predictions and to inform their risk management strategies.

21. Super trend indicator

The super trend indicator is a reliable trend-following marker directly on price charts. It relies on two key parameters for its construction: The period, often set at 10 times the average true range (ATR), and the multiplier, typically at a value of 3. Its simplicity lies in the visualization of trends; when the plotted dots appear above the price, it signals a bearish trend, while the dots below indicate a bullish market. This straightforward indicator helps traders to gauge market momentum and make informed decisions swiftly.

22. Ultimate oscillator

The ultimate oscillator is a sophisticated momentum indicator that expert traders use to gauge the velocity of an asset's price movement across various timelines. By analyzing short (7-day), medium (14-day), and long-term (28-day) market trends, this tool synthesizes a weighted average to offer a composite view of momentum. Backtesting reveals the ultimate oscillator's robust performance under diverse settings, demonstrating its effectiveness in crafting highly profitable mean reversion trading strategies. This makes it a versatile and reliable tool for informed trading decisions.

23. Choppiness index

The Choppiness index is a technical analysis tool developed by Australian commodity trader Bill Dreiss to determine whether a financial market is experiencing choppy, non-trending movement or entering a clear trend phase. This indicator operates on a scale from 0 to 100, where higher numbers represent a more choppy or range-bound market, suggesting consolidation. In contrast, lower numbers point toward a potential emergence of a directional trend. As an expert trader, understanding the readings of the Choppiness index can be instrumental in identifying periods of market stability or preparing for significant price movements.

How do technical indicators work?

Technical indicators are tools for analyzing past price and volume data to predict future price movements in financial markets. Through mathematical computations, momentum indicators hone in on the velocity of price changes using recent, short-term data, allowing traders to detect recent shifts in market momentum quickly. Conversely, trend indicators leverage longer-term data in their mathematical formulas to filter out fleeting fluctuations, offering a more defined perspective on persistent market trends. These insights are invaluable for shaping long-term investment strategies, as they help traders to discern the underlying direction in market behavior.

How many indicators should a trader use at a time?

A trader's choice of indicators should align with their trading style, experience, and preferences. It's crucial not to clutter charts with an excessive number of indicators, as this can lead to confusion and conflicting signals. 

Beginners may prefer to use more indicators for signal filtration, while seasoned traders often rely on fewer indicators due to their adeptness at reading price action. Scalpers working on short time frames should minimize the number of indicators to avoid overload. In contrast, long-term traders have the luxury of considering using more indicators for signal filtration. In comparison, more signals.

Personal comfort with chart setup is also significant. Some prefer a minimalist approach, while others may opt for a more comprehensive array. Aim to incorporate a balanced mix of indicator groups, such as trend indicators (moving averages, parabolic SAR), momentum indicators (RSI, Stochastics, CCI), volume indicators (though less reliable in the FX spot market), and volatility indicators (Bollinger Bands, ATR), to provide a well-rounded analytical perspective without redundancy. Remember, the goal is to maintain a clear and effective strategy over a crowded display of overlapping information.

Is there a short list of the best technical indicators for beginner traders?

For beginner traders looking to navigate the complex world of trading, there is a short list of some of the best technical indicators widely regarded for building a solid technical analysis foundation. 

• Moving average

• Relative strength index (RSI)

• Moving

• Bollinger bands (BB)

What are the best forex trading indicators?

If you’re wondering what the best forex trading indicators are, it’s important to understand that there are no foolproof indicators and the best approach is to combine technical analysis with fundamental analysis. Forex trading indicators help traders to analyze market trends and make informed decisions. Beyond the widely utilized RSI (relative strength index), which helps traders identify overbought or oversold conditions, the MACD (moving average convergence divergence) stands out for its ability to reveal momentum and trend directions. 

Bollinger bands also play a pivotal role by providing insights into market volatility and potential price breakouts. Seasoned traders often incorporate additional indicators such as the Stochastic oscillator, which compares a specific closing price of an asset to a range of its prices over a certain period, and the moving average, which smoothens price data to create a single flowing line, making it easier to identify the direction of the trend. 

By combining these tools, traders can develop a robust analytical framework to navigate the complexities of the forex market with greater confidence.

Are trading indicators reliable? 

Trading indicators are not foolproof and should not be relied upon exclusively. They are best utilized when combined with the analysis of price action on technical charts. This is because technical indicators can occasionally generate misleading signals on their own. 

Price movements can validate the signals suggested by these indicators to enhance reliability. Savvy traders often employ a mix of indicators, typically two to three, to verify the strength and accuracy of the trading signal. This cross-confirmation among indicators can help provide a more robust foundation for making trading decisions.

It is wise to test indicators on a demo trading account before applying them to a live account with real money. Your strategy and capital will thank you.