There are two main approaches to analyzing the markets and planing future trades: technical and fundamental. Fundamental analysts study fundamental reasons such as economic and political events that cause Forex pair prices to change. Technical analysts study how prices have moved in the past and try to find patterns that might repeat in the future.
Technical analysis is heavily dependent on the use of indicators, chart and candlestick patterns, and simple trendlines.
Some indicators improve visualization, such as lagging indicators. Lagging indicators follow prices. And others, such as leading indicators, provide traders with predictive signals. Leading indicators predict reversals and trend creations.
Each indicator should be used in certain conditions. In this Forex trading best MT5 indicators guide, we’ll discuss how to use the most popular and highly useful indicators. What’s more, we’ll discuss how fundamentals can effect technical trading. Keep in mind that having a great trading strategy that incorporates the best indicators is only a one component of successful trading. In addition, consistently profitable results require risk management and discipline.
Best MT5 Forex indicators
As already mentioned, every indicator should be used in specific market conditions. There’s no universal indicator that can always work in Forex. It’s the trader’s job to identify market conditions and apply the strategies accordingly. In general, oscillators are best for trading choppy, ranging markets. Moving averages are used for trading trends. If you use trending indicators in ranging markets, you will get a lot of false signals.
The first indicator on our list is the Awesome Oscillator, which is the commonly used technical indicator. This indicator is primarily used to confirm and disprove trends using past historical and present data. It is a part of the Oscillator family, but unlike other oscillators, it is unbound and does not swing between defined values.
Awesome Oscillator is a simple indicator to use, so even inexperienced traders can utilize it in their trading activities. It uses 5-period and 32-period Simple Moving Averages to indicate trends of strength. These simple moving averages represent the average price of an asset for a certain timeframe, in this instance 5 days and 32 days. Once we calculate these SMAs we can then calculate the Awesome Oscillator using the following formula:
Awesome Oscillator = 5-period SMA – 32-period SMA
Being a trend-following indicator means that it shows us if there is an uptrend or downtrend and how strong it is. As we see in the formula we are subtracting one SMA from the other which means we can have negative values and this is what shows us the ongoing trend. If the Awesome Oscillator is above the centerline (is more than 0) we have an uptrend on our hands, but if it falls below the centerline into a negative number, it signals that the downtrend has started.
Another way we can use this oscillator is by looking at the peaks it forms. This indicator seats below the chart and draws bars that create peaks that look like mountains. If we see that it has formed two peaks, where the second one is smaller than the first one, we can expect a trend reversal, and it might be best to change or close our market positions.
So because of all of this, we can confidently say that Awesome Oscillator is one of the best MT5 Forex indicators.
The next indicator on our list is the Moving Average Convergence Divergence, or MACD for short. It is a trend-following indicator that shows us the direction of trends using Exponential Moving Averages. It is a lagging indicator that seats below the chart, making it a really easy indicator to use. Inexperienced traders don’t have to overlay additional indicators on top of their chart, which in itself is already complicated for them.
When calculating MACD we need to look at two different EMAs and after the calculation, we can add one more additional EMA as a signal line. Exponential Moving Averages are different from Simple Moving Averages as they put more weight on recent prices, unlike SMA where both past and present prices have the same weight. For MACD calculation, we will first need to calculate 12-period and 26-period EMAs. Once they are calculated, we can easily calculate MACD using the following formula:
MACD = 12-period EMA – 26-period EMA
Just like the Awesome Oscillator, here we are subtracting two moving averages and the resulting number is our MACD, which can be either positive or negative. Once we calculate MACD, we can add 9-period EMA as a signal line and look for crossovers. If we see that MACD has crossed the Signal line and went above it, it can be a signal that an uptrend has started, and a buy position is the best option at that time. But if MACD falls below the signal line, it signals a downtrend, and it will be best for us to open short positions.
To make things even more simple, we can simply look at the histogram of MACD, which are represented as bars that seat below the chart. The height of these bars represents the distance between 12-period and 26-period EMAs. If we see that these bars started to shorten, it signals that a potential crossover is going to happen, and we should be ready for trend reversal.
Originally, MACD was developed for the Stocks market, but it was so successful that traders have adopted it in other markets as well, such as Forex and Crypto. Because of this, when talking about FX best MT5 indicators, MACD should always be in the conversation.
Exponential Moving Average is a type of moving average that puts more weight on recent price data, compared to historical data. It is a common technical indicator used by a big number of traders. It seats on top of the chart as a single line and moves according to price movement. The calculation of EMA might be a bit difficult for new traders, but on MT5, the platform does these calculations and traders don’t actually need to do the hard work themselves.
If we compare EMA to Simple Moving Average, EMA reacts to price changes more quickly than SMA, as it puts more weight on recent price movements, thus making it a better version of SMA. EMA is calculated using multiple data, which are the price today, yesterday’s EMA, the number of days we are calculating EMA for, and the multiplier. Once we have all the following information, the following formula is used to calculate EMA:
EMA = Price (T) x K + EMA(Y) x (1-k)
T = Price Today
Y = EMA Yesterday
K = 2 / (N + 1)
N = Number of days we are calculating EMA for
The most commonly used EMAs are 12-period and 26-period EMAs for short-term traders, while long-term traders prefer using 50-period and 200-period EMAs. But this does not mean that we are only limited to these periods, and we can use whichever period we think will benefit us in our technical analysis. For example, many traders use a combination of 50-period EMA and either 20-period or 10-period EMA for their technical analysis. Here, traders are looking for crossovers between these two EMAs. If we are using 50-period and 20-period EMAs, and we see that the 20-period EMA has crossed over the 50-period EMA, it means that we have an uptrend. While, if it falls below the 50-period EMA, it can be a signal of an upcoming bearish run.
But we should mention that using EMA on its own might not be the best way to use this indicator. Despite putting more weight on the recent price changes, it still is a lagging indicator, meaning that the data we receive might be slightly outdated. But if we combine it with other indicators, then the information provided by EMA becomes highly valuable. This is what makes EMA one of the best MT5 Forex indicators.
Fundamentals that can influence technical trading
Fundamental analysis is as important as a technical one, especially for long-term traders. Purely technical traders avoid placing orders during or prior to major economic events, such as interest rate decisions or CPI numbers. Many traders are using both, technical and fundamental analysis in their trading. Understanding both can be beneficial for a trader. Even if you are a purely fundamental trader, you need technical knowledge to locate the best entries and exits. Let’s see what fundamental factors cause prices to move.
Inflation means that the money you are holding in your hands is losing its purchasing power. Usually, inflation is caused by the increase in the circulating supply of currency in any given country.
Each country has its own healthy inflation rate, which is the expected rate of inflation that will not damage the economy. Most developed countries set their inflation rate at around 2% while developing countries might have higher inflation rates. High inflation makes calculations difficult for businesses and create uncertain conditions. Businesses are the ones creating real wealth. Consumer Price Index (CPI) is the main determinant of the inflation. When inflation is too high, it is expected that the central bank will increase interest rates and the currency will go up in value. If the bank fails to act accordingly, the currency will lose its value. Therefore, CPI numbers are highly important for traders.
As already mentioned, central banks are trying to limit inflation by increasing interest rates. Higher interest rates mean people will take out less loans from banks and there will be less money in circulation, which in turn will lead to a stronger currency. While the increase of interest rates has a short term positive effect on inflation, it is terrible long term.
High interest rates damage the economy long term. The less money in consumers’ pockets mean that they have less to spend, and the businesses suffer from reduced spending.
In addition, there are various important fundamentals to take into account, such as:
- Building permits
- Trade balance
FAQs on best MT5 indicators
Do the best MT5 indicators really work in Forex?
Forex market best MT5 indicators work for technical traders. Technical analysis incorporates indicators, chart and candlestick patterns as well as simple trendlines. It’s worth mentioning that not all indicators work well in various market conditions. It’s traders’ job to build a trading system for various conditions be it trending, volatile or ranging markets and apply those strategies effectively.
Are the best MT5 Forex indicators accurate?
Each indicator is built for providing certain information. The accuracy of the trading signals depend on how you use the indicators. Range trading indicators such as oscillators are highly accurate when the market goes sideways, but fail to provide reliable signals when prices start trending. Trend following indicators such as moving averages are effective in trends, but fail in choppy ranging markets. The key to successful trading is to be able to identify current market conditions and apply trading strategies accordingly. Understanding FX best MT5 indicators can certainly help in this regard.
Are the best MT5 indicators worth trying?
Yes. Profitable trading requires hard work and testing various indicators and strategies. The best MT5 Forex indicators can increase your trading balance. The best way to know if the indicators work for you is to test them using a demo account or using a micro account.