Two main types
- Trend indicators are drawn on the price chart and make the direction or range of movement easier to see (moving averages, Bollinger Bands, Ichimoku).
- Oscillators are shown in a separate panel below the chart and turn momentum or the size of moves into a number (RSI, MACD, the stochastic oscillator, ATR).
Platforms group them differently; ATR is sometimes grouped as a volatility indicator (one that shows how much the price moves). Settings (periods) also differ between platforms and traders. The numbers in this article are examples: values given by the people who created the indicators, or commonly used values. They are not recommended settings. MetaTrader 5, TradingView and other platforms all have indicators with these names, but defaults and calculations can differ slightly.
Moving averages (SMA and EMA)
What it shows: the average price over a set number of bars, drawn as a line. It smooths out small ups and downs so the direction is easier to see.
How it is calculated: a simple moving average (SMA) adds the last N closing prices and divides by N. An exponential moving average (EMA) gives more weight to recent prices: EMA = current close × P + previous EMA × (1 − P).[1] P is commonly set to 2 ÷ (N + 1).
Keep in mind: because it is an average, it moves after the price does. A longer period gives a smoother line, but a bigger delay.
RSI (Relative Strength Index)
What it shows: it compares the size of up moves and down moves over a period and shows the result from 0 to 100. More up moves push it toward 100, more down moves toward 0. J. Welles Wilder Jr. introduced it in a 1978 book.[2]
How it is calculated: RSI = 100 − 100 ÷ (1 + average up move ÷ average down move). Wilder recommended a period of 14.[3]
Keep in mind: readings above 70 are sometimes called “overbought” and below 30 “oversold.” But in a strong move, RSI can stay above 70 while the price keeps rising, or below 30 while it keeps falling.
MACD
What it shows: the difference between a short-period EMA and a long-period EMA, so you can see whether the two averages are moving apart or coming together.
How it is calculated: MACD = EMA(12) − EMA(26). The signal line is a 9-bar average of the MACD. MetaTrader 5 uses a simple moving average for the signal line, while some other platforms use an EMA.[4] Some platforms also show the difference between MACD and the signal line as a bar chart (a histogram). In MetaTrader 5, the MACD itself is drawn as bars and the signal line as a line.
Keep in mind: it is built from moving averages, so it also moves after the price. Because platforms calculate it slightly differently, the same settings can give slightly different values.
Bollinger Bands
What it shows: lines drawn above and below a moving average, at a distance based on how spread out recent prices are (the standard deviation). The bands widen when the price moves a lot and narrow when it moves little. They were created by John Bollinger.[5]
How it is calculated: middle line = 20-bar simple moving average. Upper and lower lines = middle line ± 2 × the standard deviation (20 bars). The standard deviation is a number that shows how spread out values are around their average.[6]
Keep in mind: in Bollinger’s own rules, a touch of a band is just a touch: it is not a buy or sell signal by itself. The values 20 and 2 are defaults, not fixed values.[5]
ATR (Average True Range)
What it shows: how much the price moves per bar (volatility). It does not show direction. Wilder introduced it in the same 1978 book as RSI.[2]
How it is calculated: first, find the “true range” of each bar: the largest of (1) this bar’s high minus its low, (2) the distance between the previous close and this high, and (3) the distance between the previous close and this low. ATR is the average of the true range.[7]
Keep in mind: ATR is in price units, so its size differs from pair to pair. Some traders look at it when they think about stop distance. Once you have a stop distance, the position size calculator turns it and your risk amount into a lot size.
Stochastic oscillator
What it shows: where the current close sits between the highest high and the lowest low of a recent period, from 0 to 100.
How it is calculated: %K = (current close − lowest low of N bars) ÷ (highest high of N bars − lowest low of N bars) × 100. %D is an average of %K.[8] Default periods differ between platforms.
Keep in mind: as with RSI, levels such as 80 and 20 are sometimes used as reference points, but in a strong move the indicator can stay in those ranges for a long time.
Ichimoku Kinko Hyo
What it shows: five lines that together show direction, a central price, and how past and current prices relate. The area between the two leading spans is called the “cloud.” The name is Japanese, and MetaTrader 5 includes it too.[9]
How it is calculated (with the commonly used settings of 9, 26 and 52):
- Conversion line (Tenkan-sen) = (highest high + lowest low of 9 bars) ÷ 2
- Base line (Kijun-sen) = (highest high + lowest low of 26 bars) ÷ 2
- Leading span A = (conversion line + base line) ÷ 2, drawn 26 bars ahead
- Leading span B = (highest high + lowest low of 52 bars) ÷ 2, drawn 26 bars ahead
- Lagging span = current close, drawn 26 bars back
Keep in mind: with so many lines, it helps to check what each line calculates, one at a time.
What all of them have in common
- They are all calculated from past prices. The same reading can be followed by different moves each time.
- The same indicator can give different values on different platforms or settings. Check your platform’s help.
- More indicators do not always make decisions easier. Once you choose what to use, record which one you based each trade on, so you can look back later (see What to write in a trading journal).
To calculate levels, you can also use the pivot point calculator and the Fibonacci calculator. If a word is unclear, see the forex glossary.
Sources
- MetaTrader 5 Help. Moving Average. https://www.metatrader5.com/en/terminal/help/indicators/trend_indicators/ma
- Wilder, J. W., Jr. (1978). New Concepts in Technical Trading Systems. Trend Research.
- MetaTrader 5 Help. Relative Strength Index. https://www.metatrader5.com/en/terminal/help/indicators/oscillators/rsi
- MetaTrader 5 Help. MACD. https://www.metatrader5.com/en/terminal/help/indicators/oscillators/macd
- Bollinger, J. Bollinger Band Rules. https://www.bollingerbands.com/bollinger-band-rules
- MetaTrader 5 Help. Bollinger Bands. https://www.metatrader5.com/en/terminal/help/indicators/trend_indicators/bb
- MetaTrader 5 Help. Average True Range. https://www.metatrader5.com/en/terminal/help/indicators/oscillators/atr
- MetaTrader 5 Help. Stochastic Oscillator. https://www.metatrader5.com/en/terminal/help/indicators/oscillators/so
- MetaTrader 5 Help. Ichimoku Kinko Hyo. https://www.metatrader5.com/en/terminal/help/indicators/trend_indicators/ikh