Indicators and patterns

<p>Trading is no easy feat, as many types of traders lose their capital. However, indicators for swing trading help traders achieve annual returns of 17.50%, according to Tim Morris&rsquo;s book &quot;The 97% Swing Trade&quot;.</p> &nbsp; <p>The best indicators for swing trading should enable every trader to identify market phases, time entry and exit points, and manage risks effectively. What makes swing trading indicators particularly solid is their ability to filter out noise and reveal meaningful swing patterns that last not too long nor too short.</p> &nbsp; <p>One effective approach is to combine trend, momentum, and volume indicators into a complete strategy. Not all types or combinations work, but a thoughtful system can provide an all-around view of market sentiment.</p> &nbsp; <p>In this article:</p> &nbsp; <ul> <li>What they are and the best technical indicators for swing trading</li> <li>How to combine swing trading technical indicators for high-probability setups</li> <li>Common mistakes to avoid</li> <li>A step-by-step methodology to implement swing trading strategies</li> </ul> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div class="didyouknow">Start testing your swing trading system for <a href="https://portal.thinkmarkets.com/account/individual/demo/?lang=en" target="_blank">free</a>!</div> <h2>What are swing trading indicators</h2> <p>Swing trading indicators are technical analysis tools that help traders spot meaningful price swings lasting from a few days to a few weeks. Unlike <a href="/en/trading-academy/forex/day-trade/">day trading</a> indicators (intraday focus) or position trading indicators (long-term focus), swing indicators are tuned for the medium term.</p> &nbsp; <p>What makes trading challenging is spotting turning points, in particular. These basic indicators for swing trading help analyse the market structure by identifying trends, trend reversals, and <a href="/en/trading-academy/indicators-and-patterns/continuation-candlestick-patterns/">trend continuation patterns</a>. They are attuned to medium-term movements and not to minor price movements, ignoring short-term noise and offer a picture of broader market sentiment.</p> &nbsp; <p>Here&rsquo;s a table to understand when swing indicators may be used based on the <a href="/en/trading-academy/technical-analysis/method-to-analyse/">trading method</a>:</p> <p><img alt="Swing Trading Indicators vs. Day Trading Indicators vs. Position Trading Indicators (ThinkMarkets)" src="/getmedia/c62888f1-923c-4e20-b1f1-71e4940ebaf8/Academy-Indicators-and-patterns-Swing-trading-Best-Indicators-to-Trade-Dead-Cat-Bounce-ThinkMarkets.png" /></p> &nbsp; <p style="text-align: center;">Types of Indicator Characteristics for Different Trading Styles</p> &nbsp; <p>When it comes to swing trading success, specialised sets of indicators are designed to cover different market phases.</p> <h2>Types of swing trading indicators</h2> <p>Swing trading indicators come in various sizes and shapes, and they can be grouped into four major categories, each revealing an aspect of market dynamics.</p> <p><img alt="Types of Swing Trading Indicators (ThinkMarkets)" src="/getmedia/d913210e-2dd5-48ea-b215-a6549856f3df/Academy-Indicators-and-patterns-Swing-trading-Trend-Reversal-Turns-into-Trend-Continuation-GBPUSD-1D-Chart-1.png" /></p> &nbsp; <p style="text-align: center;">Core Swing Trading Indicator Types</p> &nbsp; <ol> <li><strong>Trend Indicators:</strong> They help reveal the overall direction of the market and the strength of a trend.</li> <li><strong><a href="/en/trading-academy/technical-analysis/momentum-indicator/">Momentum Indicators</a>: </strong>They measure the rate of price change and identify when a market is gaining or losing steam. Also known as oscillators, they may highlight reversal points and divergences that signal shifts in sentiment.</li> <li><strong>Volatility Indicators:</strong> These measure the amplitude of price variation and help traders read market conditions. They can be used for position sizing and <a href="/en/trading-academy/cfds/risk-management-tools-in-cfd-trading/">risk management</a>.</li> <li><strong>Volume Indicators:</strong> They confirm price movements by measuring market interest and distinguishing between genuine and false moves.</li> </ol> &nbsp; <p>Below are the most popular indicators for swing trading:</p> <p><img alt="Best Indicators for Swing Trading (ThinkMarkets)" src="/getmedia/8a9b2afa-99c8-4c74-9caa-dd09bb940caa/Academy-Indicators-and-patterns-Swing-trading-ZigZag-Trend-Continuation-Short-Trade-with-MACD-Confirmation-GBPUSD-1D-Chart-2.png" /></p> &nbsp; <p style="text-align: center;">Popular Swing Trading Indicators by Type</p> &nbsp; <p>Swing trading signals can tell a logical story about the market that is unfolding right in front of traders&rsquo; charts. Let&rsquo;s explore what makes them valuable.</p> &nbsp; <p>Discover the <a href="/en/trading-academy/technical-analysis/trend-trading-indicators-for-forex/">top 10 trend trading indicators</a> and what signals they generate in forex here.</p> <h2>Why traders use swing trading indicators</h2> <p>Swing trading indicators help traders avoid being on the wrong side of the market and manage their risk in a rational manner. Successful swing traders use them to identify trends, time entries and exits, manage risk and quantify sentiment.</p> <p><img alt="Why Indicators Work in Swing Trading (ThinkMarkets)" src="/getmedia/b3f27836-98d7-4986-b2ed-3825f4096c22/Academy-Indicators-and-patterns-Swing-trading-ZigZag-Trend-Continuation-Short-Trade-with-MACD-Confirmation-GBPUSD-1D-Chart-1.png" /></p> &nbsp; <p style="text-align: center;">Reasons Traders Use Swing Trading Indicators</p> &nbsp; <p>Let&rsquo;s take a closer look at each of these points.</p> <h3>1. Identify trends</h3> <p>The primary reason swing traders rely on these indicators is to identify the prevailing market direction. As the saying goes, &ldquo;the trend is your friend&rdquo;, and swing trading indicators help determine in which way the market swings: up, down or sideways.</p> &nbsp; <p>Filtering out market noise is also important to stay on the right side of the market. A strong trend reading on multiple indicators can help traders maintain conviction.</p> &nbsp; <p>Understanding the underlying trend strength is equally important. Strong trends are more likely to continue, while weaker ones may lead to reversals. Divergence between price action and indicators can be used to reveal turning points.</p> <h3>2. Time entries and exit points</h3> <p>Precise and reasonable trade entries and exits can be set using swing trading indicators. For example, trend indicators confirm the direction of the move and offer dynamic <a href="/en/trading-academy/technical-analysis/support-resistance/">support or resistance</a>. On the other hand, momentum indicators show extreme levels or signs of fatigue, suggesting potential reversal points.</p> &nbsp; <p>Traders often look for confluence between multiple indicators, such as an oversold RSI in conjunction with the price bouncing off an SMA, which suggests exhaustion of selling pressure near key support.</p> <h3>3. Manage risk</h3> <p>Risk management is essential for swing trading, as it is for any trading style. No successful trader uses arbitrary exits when a trade goes south. In this type of trading, <a href="/en/trading-academy/indicators-and-patterns/technical-indicators-beginners-guide/">technical indicators</a> for swing trading can determine appropriate stop-losses based on the market&rsquo;s natural ebbs and flows. If it says that the trend is reversing, traders may want to reduce their exposure.</p> &nbsp; <p>Volatility indicators help set logical exit points where a swing trade idea would become invalid without being subject to whipsaws. As such, position size is a by-product, as low volatility may warrant a larger position.</p> <h3>4. Quantify sentiment</h3> <p>Reversals are the most challenging and rewarding market phases as previous emotions are overturned. Swing indicators offer a quantitative approach to market psychology with measurable data and help traders spot those extreme levels.</p> &nbsp; <p>Divergence is a prime example of the psychological drivers behind price movements. When momentum fades despite a rising price, sentiment may be shifting. This early warning enables traders to reposition themselves.</p> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div class="didyouknow">Add swing indicators and test your entries and exit risk-free with <a href="/en/traders-gym/" target="_blank">Traders Gym</a>!</div> <h2>How swing traders use technical indicators</h2> <p>In a practical sense, the following are some typical examples of how swing traders incorporate technical indicators into their <a href="/en/trading-academy/forex/popular-forex-trading-strategies/">trading strategies</a>.</p> <h3>Identifying support and resistance levels</h3> <p>Swing trading <a href="/en/trading-academy/technical-analysis/what-is-technical-analysis-in-trading/">technical analysis</a> reveals dynamic price levels, as opposed to horizontal lines or trendlines. For instance, moving averages serve as dynamic support during rallies and resistance during sell-offs. When the price approaches these levels, traders pay special attention to market reactions.</p> &nbsp; <p>Bollinger Bands are another option to discover dynamic areas. The upper band acts as resistance during uptrends while the lower band provides support during pullbacks.</p> <h3>Setting targets and stop-losses</h3> <p>Some technical indicators help identify points where a swing trade idea becomes invalid due to changing market conditions. As a result, exit points are defined in a logical way. For trend indicators, targets can be placed naturally below significant resistance levels, while trailing stops should be at a few pips below dynamic support.</p> &nbsp; <p>Volatility-based stop losses are helpful because they factor in swing structure in setups. The ATR is a good pick, with traders placing stops at 1 to 2 times the ATR value to account for normal volatility.</p> &nbsp; <p>Another way to identify targets is by assessing the magnitude of the current movement. Overbought/sold conditions from oscillators or upper/lower boundaries of Bollinger Bands and Keltner Channels may suggest limited room in the swing direction. This is especially true after an extended rally/drop, and traders should consider locking in their profits.</p> &nbsp; <p>Finally, the parabolic SAR provides trailing stop functionality. As the price rises in the trader&#39;s favour, the dots move closer beneath, refreshing the stop level.</p> <h3>Multiple timeframe analysis</h3> <p>Using both high and low timeframes helps traders gain conviction in their idea and precision in their execution. This ensures swing trades are in line with the dominant trend and captures short-term retracement opportunities.</p> &nbsp; <p>For instance, the daily chart would provide the overall direction using the 30-day EMA. As the price climbs steadily along the average, pullback opportunities may be found on the 4-hour chart with the RSI sinking into oversold territory.</p> &nbsp; <p>Traders should be mindful of incorporating higher timeframes into their strategies, as they must never lose sight of the broader trend. Seeing the bigger picture can significantly increase the odds of success.</p> &nbsp; <p>You can start with the default settings, as they represent time-tested parameters optimised for general market conditions, allowing you to focus on interpreting swing trade alerts.</p> &nbsp; <p>From strategy design to practical execution, technical indicators for swing trading should be part of every swing trader&#39;s toolbox. What if they could combine the quality of each type of indicator?</p> <h2>Best swing trading indicator combinations</h2> <p>Using multiple indicators helps assess the market in all its aspects: swing trend phase, momentum strength and volatility range. Here are some top indicator combinations that put the odds in the trader&rsquo;s favour.</p> &nbsp; <p>The most robust swing trading ideas combine several indicators which offer confirmation from different sources. Divergences between price and oscillator provide powerful reversal signals, and breakouts accompanied by momentum acceleration tend to be sustainable.</p> <p><img alt="Best Swing Indicator Combination in Trading (ThinkMarkets)" src="/getmedia/a7c57782-16cb-4f7c-8271-597c08238358/Academy-Indicators-and-patterns-Swing-trading-Trend-Reversal-Turns-into-Trend-Continuation-GBPUSD-1D-Chart-1-1.png" /></p> &nbsp; <p style="text-align: center;">Best Swing Trading Indicator Combinations</p> <h3>MA + RSI: price convergence, divergence</h3> <p>One of the most popular and straightforward combinations is the use of moving averages for swing trading, complemented by momentum confirmation.</p> &nbsp; <ul> <li><strong>Setup:</strong> Price pulls back to the MA in an uptrend, and the RSI shows oversold conditions near 30. This tandem offers excellent risk-reward ratios as the moving average acts as dynamic support.</li> <li><strong>Execution:</strong> Entry near the MA support. Scale exit as the RSI reaches overbought levels, or when the price invalidates the MA.</li> </ul> <h3>Price + Stochastic: momentum divergence</h3> <ul> <li><strong>Price + Stochastic:</strong> This setup combines price action with a momentum indicator like Stochastic to identify reversals.</li> <li><strong>Setup:</strong> In a bullish scenario, the price makes a lower low whilst the Stochastic makes a higher low, indicating weakening selling pressure.</li> <li><strong>Execution:</strong> Wait for the price to break into a new swing high, which would indicate renewed buying interests. Place stops just beyond the recent swing low.</li> </ul> <h3>Bollinger band + MACD: rebound momentum</h3> <p>Designed to catch reversals and ride the next trend and assess its strength.</p> &nbsp; <ul> <li><strong>Setup:</strong> Price touches the lower Bollinger Band and MACD shows bullish divergence (price making lower lows but MACD making higher lows) or the MACD line crosses above the signal line.</li> <li><strong>Execution:</strong> Entry as the price bounces back from the lower band, especially with a solid bullish candlestick. Set stop loss below the recent low outside the band.</li> </ul> &nbsp; <p>Besides indicators, strategies can benefit from complementary swing trading tools.</p> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div class="didyouknow">Backtest your own swing trading indicator combinations in live trading conditions for <a href="/en/traders-gym/" target="_blank">free</a>!</div> <h2>Top swing trading tools</h2> <p>Many swing trading tools can be used in conjunction with other indicators and help traders make informed decisions. They may find confidence in alignment that confirms a specific pattern and avoid low-probability setups that show contradiction.</p> <h3>Price action breakouts</h3> <p>Breakouts can be combined with several indicators to confirm a swing trend or a potential swing structure reversal.</p> &nbsp; <p>Key patterns include:</p> &nbsp; <ul> <li>Horizontal lines, psychological levels</li> <li><strong>Dynamic lines:</strong> trendlines and moving averages</li> <li>Fibonacci retracement levels</li> </ul> &nbsp; <p>When price breakouts occur at the time indicator signals are flashing, they can reveal high-probability setups. On the other hand, fakeouts often occur due to a lack of confirmation in swing trading technical indicators, such as volume or momentum indicators.</p> <h3>Candlestick and chart patterns for swing trading</h3> <p><a href="/en/trading-academy/forex/using-candlestick-patterns-in-forex-day-trading/">Candlestick</a> and chart patterns provide technical context for swing signals, helping traders understand swing structure. Volatility, momentum and trading volume gauges can foreshadow price moves that last.</p> &nbsp; <p>Key patterns include:</p> &nbsp; <ul> <li><strong>Indecision:</strong> Dojis, <a href="/en/trading-academy/technical-analysis/single-candlestick-patterns-a-guide-for-day-trading/">spinning tops</a></li> <li><strong>Reversal:</strong> Double tops/bottoms, <a href="/en/trading-academy/indicators-and-patterns/head-and-shoulders-pattern/">head and shoulders</a>, hammers, <a href="/en/trading-academy/technical-analysis/using-double-candlestick-patterns-in-day-trading/">engulfing candles</a></li> <li><strong>Continuation:</strong> Flags and pennants</li> </ul> &nbsp; <p>Indicators would confirm the market phase here. For example, a <a href="/en/trading-academy/indicators-and-patterns/doji-candlestick-pattern/">doji</a> at the bottom of a recent sell-off alongside an RSI exhibiting oversold conditions can be seen as a sign of exhaustion. Or when a bearish divergence is followed by engulfing red candles, sellers might have gained control.</p> &nbsp; <p>While swing trading indicators are important, as with all tools, how you use them is more important than the tool itself. Smart traders learn from others&#39; mistakes.</p> &nbsp; <p>Learn all about <a href="/en/trading-academy/technical-analysis/day-trading-chart-patterns/">day trading chart patterns</a> in our forex guide</p> <h2>Mistakes to avoid with swing trading indicators</h2> <p>Trading has a steep learning curve, and traders should beware of pitfalls when adapting new indicators to their swing trading strategy. Some of the biggest mistakes are examined below.</p> <p><img alt="Swing Trading Indicator Mistakes (ThinkMarkets)" src="/getmedia/c7b62dac-0500-48c5-b9c5-0c91416dee8a/Academy-Indicators-and-patterns-Swing-trading-Zig-Zag-Trend-Continuation-Short-Trade-with-MACD-Confirmation-GBPUSD-1D-Chart-3.png" /></p> &nbsp; <p style="text-align: center;">Common Mistakes with Swing Indicators</p> <h3>Failure to recognise false signals</h3> <p>False signals represent one of the greatest challenges in swing trading, as they can erode both capital and confidence. Identifying these deceptive swing patterns helps preserve trading capital and discipline.</p> <h3>Relying on single indicators</h3> <p>Placing too much faith in a single indicator can hurt performance, as no indicator fits all market conditions. While oscillators like the RSI may work well in range-bound markets, they have limited use in trending phases, as oversold and overbought become relative.</p> &nbsp; <p>The lack of extra confirmation often leads to false signals. Traders should seek confirmation from two or more different indicator types before entering positions.</p> <h3>Overcomplicating trading strategies</h3> <p>Some traders fall into the trap of using too many indicators, creating cluttered charts that even the best swing trading strategies can handle. This &quot;analysis paralysis&quot; generates conflicting signals and prevents timely trade execution.</p> &nbsp; <p>Traders should keep charts clean with no more than 5 indicators of different types that complement each other. For example, momentum indicators (RSI, Stochastic, and Williams %R) measure the same thing - traders just need to pick one.</p> <h3>Ignoring market context</h3> <p>Using the same indicator across all conditions produces more noise than actionable signals. Trading bullish signals on hourly timeframes when the daily trend is bearish is a recipe for disaster.</p> &nbsp; <p>Check the underlying market context and higher timeframes beforehand. 3-4 indicators that offer perspectives on trend, momentum and volatility help examine the market from different angles.</p> <h3>Chasing lagging signals</h3> <p>Lagging indicators confirm what has already happened rather than predicting future moves. Many traders chase signals after significant moves, entering positions at poor risk-reward levels. Buying at a golden MA cross when the price has already moved substantially is a textbook mistake.</p> &nbsp; <p>Combine lagging indicators with leading ones. Divergences offer early warning signs before the market turns. Use price action as real-time confirmation for swift reactions.</p> <h3>Over-optimising</h3> <p>Some traders tweak indicator settings to produce perfect results on past data. This practice, known as curve fitting, creates a false sense of confidence, as markets are in constant motion. Strategies that worked historically may fail in today&#39;s environment. Go for a balanced approach and pay attention to various market conditions.</p> &nbsp; <p>By steering clear of these mistakes, you can build a strong and logical methodology for trading using swing trading indicators.</p> <h2>How to trade swing trading indicators</h2> <p>Successful swing trading with indicators requires a systematic approach that combines technical analysis with disciplined swing trading risk management.</p> <h3>Step 1: Scan for trading opportunities</h3> <ul> <li>Prepare a watchlist of regularly traded instruments</li> <li>Review broad market conditions per symbol: trend, range or correction</li> <li>Set up a scanner and alerts for key levels or chart pattern breakouts</li> <li>Beware of the upcoming major news</li> </ul> <h3>Step 2: Apply primary indicator</h3> <ul> <li>Apply the primary swing trading indicator to the chart</li> <li>Adjust parameters and sensitivities: e.g. 20 or 50 periods for MAs</li> <li>Configure timeframes that work best for swing trading: 1H, 4H or daily</li> </ul> <h3>Step 3: Add secondary swing indicator</h3> <ul> <li>Layer a complementary indicator for confirmation (oscillator or volume)</li> <li>Watch for confluence between indicators and price action</li> <li><strong>Define clear signals:</strong> MA crosses or oscillator rebound</li> </ul> <h3>Step 4: Assess risk</h3> <ul> <li>Assess volatility with ATR or market structure</li> <li>Calculate appropriate stop-loss (1-2 times ATR or structure-based)</li> <li>Determine position size from the stop distance and account size (e.g. 2%)</li> <li>Set initial target (1:2 RR ratio)</li> </ul> <h3>Step 5: Execute trade or set pending orders</h3> <ul> <li>Use market orders for immediate execution</li> <li>Use limit orders to control entry price, especially for larger lots</li> <li>Attach stops and targets to remove emotional trading</li> </ul> <h3>Step 6: Manage swing trade</h3> <ul> <li>Monitor indicators and prepare for potential reversals</li> <li>Move the stop to breakeven as the profit matches the risk</li> <li>Use trailing stops based on indicators (Parabolic SAR, MAs or structure-based)</li> <li>Close positions when indicators show exhaustion or opposite signals</li> <li>Review signals and the trade in a post-trade analysis</li> </ul> &nbsp; <p>Now, let&rsquo;s apply this practical advice to real market conditions.</p> <h2>Swing trade example with indicators - XAUUSD Jan 25</h2> <p>In the swing trading chart below for XAUUSD, we apply the above methodology and a brief analysis to showcase this structured approach.</p> <h3>Initial setup</h3> <ul> <li>Timeframes 4H and 1H</li> <li><strong>Primary indicator:</strong> 50-SMA</li> <li><strong>Secondary indicator:</strong> RSI</li> <li><strong>Confirmation:</strong> Volume</li> </ul> <h3>Swing trade analysis</h3> <ul> <li><strong>Price action:</strong> On the daily chart, the precious metal enters a consolidation phase following a recent all-time high. The bias remains bullish and the trader awaits continuation signals. The 4H chart breaks above the double tops at $2720, suggesting renewed buying interest.</li> <li><strong>Indicators:</strong> The price follows a rising <a href="/en/trading-academy/indicators-and-patterns/sma-indicator/">SMA</a> and the latest pullback stops at the moving average. The 4H and 1H RSIs go neutral and below 30, respectively. Volume shows a steady buildup and a surge the next day, confirming the momentum.</li> </ul> <h3>Trade execution</h3> <ul> <li><strong>Entry:</strong> Two options here: an aggressive swing long at $2740 over the SMA as volatility settles with a doji; or a more conservative <a href="/en/trading-academy/technical-analysis/order-types/">swing buy</a> at $2785 at the next breakout, further confirmed by volume.</li> <li><strong>Stop-loss:</strong> Below the recent low at $2686 (below the MA)</li> <li><strong>Target: </strong>Initial take-profit at the round number $2846 (1:2 risk-reward ratio)</li> </ul> <p><img alt="Best Trading Platform for Swing Traders (ThinkMarkets)" src="/getmedia/9dfa6f1b-bdf5-4f39-8225-c93491361df9/Academy-Indicators-and-patterns-Swing-trading-ZigZag-Trend-Continuation-Short-Trade-with-MACD-Confirmation-GBPUSD-1D-Chart-4.jpg" /></p> &nbsp; <p style="text-align: center;">Swing Trading Indicator Strategy, SMA + RSI + Volumes - Gold, 4H Chart</p> <h3>Trade management</h3> <ul> <li>Move stop-loss to breakeven as price moves to $2792 at (1:1 risk-reward ratio)</li> <li>Lift stop-loss to recent low at $2770 as price moves to $2846 (1:2 risk-reward ratio)</li> <li>Trail stops below the SMA</li> <li>The RSI shows overbought and bearish divergence with the price in the 2940 area</li> <li>Exit remaining positions at $2910 as price breaks below the SMA with $170 profits per ounce</li> </ul> <h3>Lessons learnt</h3> <ul> <li>Multiple indicators work in tandem with the prevailing trend</li> <li>1H chart provides a granular entry point when RSI shows sell exhaustion</li> <li>Final exit consistent with the indicator&rsquo;s divergence and price breakout</li> </ul> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div class="didyouknow">Ready to implement a structured approach to swing trading? Open an account <a href="https://portal.thinkmarkets.com/account/individual/?lang=en" target="_blank">now</a>!</div> <h2>Conclusion</h2> <p>Trading indicators for swing trading are important for navigating complex market movements, providing traders with quantitative tools to identify potential trading opportunities within different market phases.</p> &nbsp; <p>The key to swing trade success lies not in tweaking for the perfect indicator but in understanding how different swing trade signals complement each other and developing a systematic approach to their application. Trend, momentum, volatility and volume help see through the market. Swing traders should remember that:</p> &nbsp; <ul> <li>Swing trading technical indicators provide meaningful insights into market sentiment</li> <li>They are most effective as part of a combined, technical-focused strategy</li> <li>They offer valuable guidance on proper risk management</li> </ul> &nbsp; <p>Consistent application of these indicators, combined with discipline, will serve traders far better than searching for the next perfect signal. But as with any trading approach, swing trading involves the risk of losing your capital.</p>

<p>The Average Directional Index (ADX) is a popular trend momentum indicator used as a technical analysis tool in forex in order to trade trend continuations.</p> &nbsp; <p>Unlike directional trend trading indicators, the ADX indicator specifically quantifies trend strength, allowing traders to determine whether a bullish or bearish trend is likely to continue, stall, or reverse. However, it produces double-digit risk-adjusted returns when trading trends, per quantified strategies.</p> &nbsp; <p>Whether a beginner trend trader learning the forex technical indicator or an experienced one fine-tuning their trend-following strategy, the ADX trend strength indicator can be a powerful trading tool to add to your arsenal.</p> &nbsp; <p>In this article, we aim to equip forex traders with the following:</p> &nbsp; <ul> <li>What the ADX trend trading indicator is</li> <li>How the forex technical indicator works</li> <li>Trading signals generated by the ADX</li> <li>Why the ADX indicator matters for trend signals</li> <li>Different ADX indicator strategies</li> <li>Real examples using the forex indicator</li> <li>Limitations and considerations of the trend indicator</li> </ul> <h2>What is the Average Directional Index</h2> <p>The Average Directional Index (ADX) is a lagging indicator that measures the strength of a trend on a scale of 0 to 100, used to confirm established trends rather than predict new ones. Unlike other trend oscillators that focus on the direction of the trend, the ADX quantifies the strength of the trend, regardless of whether the trend is bullish or bearish.</p> &nbsp; <p>J. Welles Wilder introduced the ADX in his 1978 book &#39;New Concepts in Technical Trading Systems&#39;, originally a component of his broader Directional Movement Index (DMI) system, which includes the ADX line and the directional +DI and -DI lines. While the ADX measures trend strength, the +DI and -DI show trend direction, often displayed as a complete system, as they work as complementary parts of a trend analysis system.</p> &nbsp; <p>To add the ADX <a href="/en/trading-academy/indicators-and-patterns/technical-indicators-beginners-guide/">trend trading indicator</a>, aka ADX line, to your ThinkMarkets chart, navigate to the indicators menu, type &#39;ADX&#39; and select &quot;Average Directional Index&quot;</p> <p><img alt="ADX Indicator (ThinkMarkets)" src="/getmedia/c833e394-1432-4505-8ac5-55e9698a9cc7/Academy-Indicators-and-patterns-ADX-Indicator-ZigZag-Indicator-on-GBPUSD-1D-chart-ThinkMarkets-TradingView.jpg" /></p> &nbsp; <p style="text-align: center;">ADX Chart, ThinkMarkets TradingView</p> <h2>How the ADX Works</h2> <p>The ADX momentum indicator consists of one main component that measures trend strength. However, it is typically displayed alongside two directional components that are not shown but still used in the calculations:</p> &nbsp; <ul> <li><strong>ADX line:</strong> Represents trend strength by measuring the absolute difference between +DI and -DI lines, displayed as a smoothed moving average. This is the actual ADX indicator itself.</li> <li><strong>+DI (Positive Directional Indicator):</strong> Compares today&#39;s high with yesterday&#39;s high. If today&#39;s high exceeds yesterday&#39;s, the +DI line moves up.</li> <li><strong>-DI (Negative Directional Indicator):</strong> Compares today&#39;s low with yesterday&#39;s low. If today&#39;s low is lower, the -DI line moves down.</li> </ul> &nbsp; <p>When analysing charts, trend traders look at the ADX value to determine if there is a strong trend and the +DI and -DI relationship to determine whether that trend is bullish or bearish.</p> &nbsp; <p><a href="/en/trading-academy/indicators-and-patterns/adx-indicator/">The default ADX indicator settings</a> of 14 periods work well for most trading scenarios, though this can be adjusted based on your trading timeframe and preferences.</p> &nbsp; <p>Here is an image with the key components of the ADX DMI indicator on default settings (notice the ADX line, plus the directional lines):</p> <p><img alt="ADX DMI Settings (ThinkMarkets)" src="/getmedia/f08e06d7-5846-4874-8948-c4e8a5fa85e2/Academy-Indicators-and-patterns-ADX-Indicator-ZigZag-Indicator-Settings-on-GBPUSD-1D-chart-ThinkMarkets-TradingView.jpg" /></p> &nbsp; <p style="text-align: center;">Default ADX Indicator Settings (+DI, -DI), EURUSD 1D Chart</p> <h2>ADX Formula Calculation</h2> <p>The ADX calculation involves four steps that transform price movement into a measure of trend strength:</p> &nbsp; <ol> <li><strong>Calculation of the directional movements:</strong><br /> Positive Directional Movement (+DM) = Current High - Previous High (if positive and greater than -DM)<br /> Negative Directional Movement (-DM) = Previous Low - Current Low (if positive and greater than +DM)</li> <li><strong>Wilder&#39;s smoothing using the Average True Range (ATR):</strong><br /> +DI = 100 &times; (Smoothed +DM &divide; ATR)<br /> -DI = 100 &times; (Smoothed -DM &divide; ATR)</li> <li><strong>Directional Index (DX) calculation:</strong><br /> DX = 100 &times; |+DI - -DI| &divide; (+DI + -DI)</li> <li><strong>ADX Calculation as a smoothed average of DX values:</strong><br /> ADX = ((Previous ADX &times; 13) + Current DX) &divide; 14 (for the standard 14-period setting)</li> </ol> &nbsp; <p>Most <a href="/en/trading-academy/forex/what-is-forex-trading/">forex traders</a> can focus more on interpreting the ADX readings rather than calculating them, as trading platforms automatically perform these calculations.</p> <h2>Why Forex Traders Use the Trend Strength Indicator</h2> <p>While useful in forex trading, the ADX momentum indicator performs well across multiple asset classes, making it a cornerstone technical analysis tool for multi-market traders who need reliable trend strength measurement across their entire portfolio.</p> &nbsp; <p>Here are the main reasons that forex traders should consider the ADX:</p> &nbsp; <ul> <li><strong>Helps Avoid Choppy Market Losses:</strong> It filters out low-momentum, sideways markets, reducing stop-outs from false breakouts or unclear direction</li> <li><strong>Confirms Strong Trends Entry:</strong> It confirms strong trend strength, assuring trend traders they are not entering too early or in a weak move</li> <li><strong>Improves Strategy Accuracy:</strong> It acts as a trend filter, improving strategies like moving average crossovers by triggering trades only when the trend has momentum</li> <li><strong>Enhances Entry and Exit Timing:</strong> It can be used to time entries more effectively, ride trends for longer, and exit at logical points</li> </ul> &nbsp; <p>Different trading styles benefit from ADX in unique ways. <a href="/en/trading-academy/forex/day-trade/">Day traders</a> might use shorter periods (7-10) on lower timeframes to capture quick momentum shifts, while swing traders typically rely on standard settings (14) to identify multi-day trends.</p> &nbsp; <p>The table below outlines how each primary type of forex trader can use ADX in distinct ways.</p> <p><img alt="ADX Traders (ThinkMarkets)" src="/getmedia/1ec616ef-5c0b-4873-bfd2-c54fec978ac0/Academy-Indicators-and-patterns-ADX-Indicator-Best-Forex-Indicators-for-Trend-Trading-ThinkMarkets.png" /></p> &nbsp; <p style="text-align: center;">Optimal ADX Indicator Settings per Trader Type</p> <h2>How Trend Traders Use ADX</h2> <p>The ADX trend trading indicator alone (the ADX line) shows trend strength based on its position on the 0-100 scale.</p> &nbsp; <p>The table below is a guide on how the ADX works within relevant trading environments and strategy approaches:</p> <p><img alt="Trading the ADX Momentum Indicator (ThinkMarkets)" src="/getmedia/ee0a012b-a6a8-47a5-a4a0-a8eefb512992/Academy-Indicators-and-patterns-ADX-Indicator-Best-Forex-Indicators-for-Trend-Trading-ThinkMarkets-1.png" /></p> &nbsp; <p style="text-align: center;">How Traders Use the ADX Momentum Indicator</p> &nbsp; <p><strong>Note:</strong> A reading above 75 is rare, but the ADX may signal a powerful trend that is likely to reverse soon at such high levels.</p> &nbsp; <p>Below is an example of EURUSD, showing each of the four different ADX stages.</p> <p><img alt="ADX Trend Strength Indicator (ThinkMarkets)" src="/getmedia/d74fdb48-8bf0-4f91-8323-b8c2212cdedf/Academy-Indicators-and-patterns-ADX-Indicator-Major-Trend-Reversal-Example-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ADX Trend Strength Stages, Line Value, EURUSD 1D Chart</p> &nbsp; <p>Trend traders use both the ADX line values and other signals for trading decisions around the strength and direction of a trend.</p> &nbsp; <p><strong>Tip for Beginner Traders:</strong> When first adding ADX to your charts, start by identifying markets with ADX above 25 or 30, as this setup provides the best environment for learning how the trading indicator responds to strong trending conditions.</p> <h2>ADX Trading Signals</h2> <p>The ADX indicator has the ability to generate several trading signals, allowing traders to identify trend strength, anticipate trend changes, and determine optimal entry and exit points. The four primary signals, when including directional components, are:</p> &nbsp; <ol> <li><strong>Trend strength</strong></li> <li><strong>Directional movement</strong></li> <li><strong>ADX divergence</strong></li> <li><strong>Entry confirmation</strong></li> </ol> &nbsp; <p>Let&rsquo;s look into these separately.</p> <h3>1. ADX Trend Strength</h3> <p>As we have already demonstrated, when the ADX rises above 20-25, it indicates increasing trend strength. This confirms <a href="/en/trading-academy/technical-analysis/momentum-indicator/">trend momentum</a> and suggests that trend traders should maintain or consider entering positions aligned with the prevailing trend.</p> &nbsp; <ul> <li>A rising ADX with an increasing slope signals accelerating momentum, often the strongest phase of trend development.</li> <li>A falling ADX warns of weakening trend momentum and often precedes ranges or trend reversals, suggesting trend traders should tighten stops or begin scaling out of positions.</li> </ul> <h3>2. Directional Movement Signals</h3> <p>The relationship between +DI and -DI lines indicates market direction and generates important trading signals:</p> &nbsp; <ul> <li><strong>+DI crosses above -DI with ADX rising:</strong> Bullish signal suggesting upward momentum is gaining control</li> <li><strong>-DI crosses above +DI with ADX rising:</strong> Bearish signal indicating downward momentum is strengthening</li> </ul> &nbsp; <p>The wider the separation between these lines after a crossover, the stronger the directional movement. Notice the <a href="/en/trading-academy/indicators-and-patterns/bullish-bearish-divergence/">divergence</a> of the DI lines in the EURUSD example above, when the ADX line crossed the 40 level.</p> <p><img alt="ADX Crossover +DI and -DI (ThinkMarkets)" src="/getmedia/79de1127-9578-4ce1-8005-02f8d7128818/Academy-Indicators-and-patterns-ADX-Indicator-Trend-Reversal-Turns-into-Trend-Continuation-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ADX Crossover of the +DI and -DI Lines, EURUSD 1D Chart</p> <h3>3. ADX Momentum Divergence Signals</h3> <p>When price makes new highs/lows but the ADX fails to make corresponding new highs, divergence occurs. This suggests that the trend is losing momentum, despite continued price movement, and often precedes a trend reversal or significant pullback.</p> &nbsp; <p>For example, if price pushes to new lows in a downtrend but ADX makes a lower high compared to its previous peak, the downward momentum is likely weakening despite the lower prices. Sticking to the EURUSD chart, see below (note the current ADX line while EURUSD is at a peak).</p> <p><img alt="ADX Divergence, Trend Reversal (ThinkMarkets)" src="/getmedia/71757038-c981-4bb5-8824-6ae01ebe9202/Academy-Indicators-and-patterns-ADX-Indicator-ZigZag-Steeper-Angle-Produces-More-Gains-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ADX Divergence with Price Leads to Trend Change</p> <h3>4. ADX Entry Confirmation Signals</h3> <p>To increase confidence in ADX-generated entry signals, look for these additional confirmations:</p> &nbsp; <ul> <li><strong>Rejection of key levels:</strong> A DI crossover followed by a strong rejection candle (pin bar, <a href="/en/trading-academy/indicators-and-patterns/bullish-bearish-engulfing-patterns/">engulfing pattern</a>) at a recent swing point</li> <li><strong>Volume surge:</strong> A DI crossover accompanied by significantly higher volume, suggesting institutional participation</li> <li><strong>Structure break:</strong> Price breaking through key support/resistance levels as ADX rises past 25, confirming the new trend direction</li> </ul> <p><img alt="ADX Confirmation, Trend Trade (ThinkMarkets)" src="/getmedia/42409e4b-4c68-47f1-8629-76cf9fe6db99/Academy-Indicators-and-patterns-ADX-Indicator-ZigZag-RSI-Reversal-Long-Trade-with-Trend-Confirmation-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ADX Confirmation Methods for Entering Trend Trades</p> &nbsp; <p>These combined signals typically produce the highest probability ADX-based trades.</p> &nbsp; <p>In summary, the four primary trading scenarios with ADX are:</p> &nbsp; <ol> <li>+DI &gt; -DI and ADX rising = Confirmed uptrend</li> <li>-DI &gt; +DI and ADX rising = Confirmed downtrend</li> <li>+DI &gt; -DI and ADX falling = Weakening uptrend</li> <li>-DI &gt; +DI and ADX falling = Weakening downtrend</li> </ol> &nbsp; <p>Understanding these trend signals progressively builds your ADX expertise. Begin by mastering basic trend strength interpretation, then incorporate average directional movement signals, and finally, advance to divergence analysis.</p> &nbsp; <p>Still, not all ADX signals work out.</p> <h2>Common False Signals With the ADX</h2> <p>Despite providing solid trend signals, the ADX can produce false signals, which can lead to delayed entries or premature exits. Watch out for:</p> &nbsp; <p><strong>Frequent DI crossovers:</strong> When +DI and -DI cross frequently, indicating a lack of directional commitment. <strong>Fix:</strong></p> &nbsp; <ul> <li>Avoid crossovers unless ADX rises between 20 and 25, with price structure breaks</li> <li>Use higher timeframes (4H+) for clearer trend signals</li> <li>Apply multi-timeframe alignment</li> </ul> &nbsp; <p><strong>Late DI crossovers:</strong> Crossovers often come after much of the move has been completed. <strong>Fix:</strong></p> &nbsp; <ul> <li>Look for the first crossover with ADX rising above 25</li> <li>Avoid signals when ADX exceeds 40 (overextended move)</li> </ul> &nbsp; <p><strong>ADX-price divergence:</strong> Price breaks support/resistance without ADX rise (false breakout), or ADX rises while price fails to make new highs/lows (weakening momentum). <strong>Fix:</strong></p> &nbsp; <ul> <li>Validate ADX readings with structural analysis or momentum indicators</li> <li>Check if price action aligns with the ADX trajectory</li> </ul> &nbsp; <p>Reducing false signals can help build better strategies.</p> <h2>ADX Trading Strategies</h2> <p>The ADX can be adapted to various trading systems and serves as a confirmation tool for a trading strategy.</p> &nbsp; <p>Four popular ADX trading strategies that each have an edge during different market conditions and trading styles are:</p> <h3>1. ADX Trend Confirmation Strategy</h3> <p>This ADX strategy aims to validate the existence of a trend and its strength before entering a trade.</p> &nbsp; <p><strong>How it Works:</strong></p> &nbsp; <ul> <li>Use the ADX line to determine trend strength</li> <li>Monitor the +DI and -DI lines for trend direction</li> <li>A trend is considered trade-worthy when ADX is above 25 and rising</li> <li>Use +DI &gt; -DI for long bias, and -DI &gt; +DI for short bias</li> </ul> <h3>2. ADX Momentum Divergence Strategy</h3> <p>The ADX divergence strategy focuses on identifying bullish or bearish divergence between price movement and ADX values to capitalise on potential trend reversals.</p> &nbsp; <p><strong>How it Works:</strong></p> &nbsp; <ul> <li>Look for price making new highs/lows while the ADX fails to make new highs/lows</li> <li>This suggests the trend is losing strength, even if the price hasn&rsquo;t reversed yet</li> <li>Confirm with +DI/-DI crossover against the prevailing trend</li> </ul> <h3>3. ADX Strategy with Moving Average</h3> <p>This combination enhances trend-following strategies by combining ADX with a moving average.</p> &nbsp; <p><strong>How it Works:</strong></p> &nbsp; <ul> <li>Use a trend-defining moving average (e.g., 50 or 100 EMA)</li> <li>Enter trades in the direction of the moving average slope</li> <li>Use ADX to confirm the trend strength</li> <li>Use +DI/-DI crossovers as timing signals for entries</li> </ul> <h3>4. ADX Breakout Strategy</h3> <p>This ADX indicator strategy allows traders to time entries precisely as a new trend or breakout begins following periods of consolidation.</p> &nbsp; <p>How it Works:</p> &nbsp; <ul> <li>Identify a tight range zone (e.g., triangle, flag, or sideways channel)</li> <li>Watch for low ADX readings (typically below 20), which suggest low volatility</li> <li>A breakout followed by a rising ADX from below 20 to above 25 confirms the beginning of a strong move</li> <li>Direction can also be confirmed with +DI/-DI crossover and price action</li> </ul> &nbsp; <p>However, all ADX strategies can be effective when combined with other analytical methods.</p> <h2>How to Use the ADX Indicator with Other Technical Analysis Methods</h2> <p>While the ADX momentum indicator excels at measuring trend strength, it also works well when paired with other technical analysis tools to provide direction and confirmation.</p> <h3>ADX and Price action</h3> <p>When the ADX rises above 25 with either the +DI or -DI dominant, forex traders should verify this signal by identifying key structural breaks.</p> &nbsp; <p>A rising ADX might suggest increasing momentum, but if price remains trapped within a range or fails to break previous swing points, the signal lacks conviction.</p> &nbsp; <p>Remember that no trading tool, including ADX, should override a clear price structure.</p> <h3>ADX and Volume</h3> <p>A breakout accompanied by a DI crossover and rising ADX becomes significantly more reliable when supported by above-average volume.</p> &nbsp; <p>Conversely, low-volume breakouts with strong ADX readings often fail, as they suggest retail rather than institutional participation.</p> &nbsp; <p>The interplay between volume expansion and ADX strength creates a powerful confirmation system for trending moves.</p> <h3>ADX and Candlestick Patterns</h3> <p>A bullish engulfing candle forming during a +DI crossover with rising ADX indicates aggressive buying pressure at a critical juncture.</p> &nbsp; <p>Similarly, bearish patterns like evening stars or shooting stars during -DI dominance can provide ideal short entries.</p> &nbsp; <p>These <a href="/en/trading-academy/forex/using-candlestick-patterns-in-forex-day-trading/">candlestick pattern formations</a> help visualise the psychological battle between buyers and sellers at key decision points.</p> <h3>ADX and Relative Strength Index (RSI)</h3> <p>When the <a href="/en/trading-academy/indicators-and-patterns/rsi-indicator/">RSI</a> sits above 50 during a bullish DI crossover with a rising ADX, it signals aligned upward momentum across multiple trading indicators.</p> &nbsp; <p>Observe for RSI divergence. When price makes higher highs while RSI makes lower highs, it suggests weakening momentum despite ADX strength, warning of potential trend reversals.</p> <h3>ADX and Bollinger Bands</h3> <p>A price breaking beyond the upper or lower band during a rising ADX suggests <a href="/en/trading-academy/forex/currency-volatility/">expanding volatility</a> in the breakout direction, which is a potential entry signal.</p> &nbsp; <p>However, if the ADX rises while the price remains within narrowing bands, the move may lack the necessary volatility for a sustained breakout, increasing the risk of a false signal.</p> <h3>ADX and Moving Average Convergence Divergence (MACD)</h3> <p>A rising ADX aligned with an expanding MACD histogram above zero reinforces bullish trend momentum, while readings below zero confirm bearish pressure.</p> &nbsp; <p>This combination helps filter out many false signals that plague range-bound markets.</p> &nbsp; <p>The table summarises the various technical analysis methods that can be combined with ADX signals.</p> <p><img alt="ADX Combinations (ThinkMarkets)" src="/getmedia/edcd8613-c681-4c55-b52a-6bcf7d2a29e1/Academy-Indicators-and-patterns-ADX-Indicator-Best-Forex-Indicators-for-Trend-Trading-ThinkMarkets-2.png" /></p> &nbsp; <p style="text-align: center;">How ADX Indicator Works with Complementary Technical Indicators</p> <h2>ADX Strategy with Triple Confirmation</h2> <p>The example below demonstrates the ADX breakout strategy on the GBPCAD 4H chart, improved with a triple-confirmation approach:</p> &nbsp; <ol> <li><strong>ADX (14):</strong> Trend strength confirmation</li> <li><strong>RSI (14):</strong> Trend momentum confirmation</li> <li><strong>Price Action:</strong> Pattern confirmation</li> </ol> &nbsp; <p><strong>Setup:</strong> ADX (14) + RSI (14) + descending triangle</p> <p><img alt="ADX Breakout Strategy (ThinkMarkets)" src="/getmedia/64252f09-16a4-4a59-b51b-081469724788/Academy-Indicators-and-patterns-ADX-Indicator-ZigZag-Trend-Continuation-Short-Trade-with-MACD-Confirmation-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ADX Breakout Strategy with Triple Confirmation</p> &nbsp; <p><strong>Market Context:</strong></p> &nbsp; <ul> <li>GBPCAD had formed a descending triangle pattern, indicating potential bearish pressure</li> <li>ADX had been below 20, suggesting a non-trending, consolidation phase</li> <li>RSI was showing early signs of bearish momentum</li> </ul> &nbsp; <p><strong>Signal Formation:</strong></p> &nbsp; <ul> <li>Price broke out of the triangle&#39;s support with a bearish candle</li> <li>The RSI reflected an oversold zone, supporting the bearish momentum</li> <li>ADX rose above 25, indicating trend strength</li> <li>All three confirmation elements aligned: pattern breakout (price action), momentum (RSI), and trend strength (ADX)</li> </ul> &nbsp; <p><strong>Trade Execution:</strong></p> &nbsp; <ul> <li><strong>Entry:</strong> A trader would have entered after the bearish candle closed (1.7789)</li> <li><strong>Stop-loss:</strong> 50 pips above the breakout candle high at 1.7950</li> <li><strong>Take-profit</strong>: When +DI crosses -DI at 1.7575 (RSI above 50), resulting in a 1.33x risk-reward ratio</li> </ul> &nbsp; <p><strong>Why This Strategy Works:</strong></p> &nbsp; <p>This multi-confirmation approach combines the strengths of three different types of analysis:</p> &nbsp; <ul> <li>ADX confirms the presence of tradeable trend strength</li> <li>RSI validates the momentum direction</li> <li>The <a href="/en/trading-academy/technical-analysis/day-trading-chart-patterns/">chart pattern</a> (<a href="/en/trading-academy/technical-analysis/the-triangle-chart-pattern-a-short-guide/">descending triangle</a>) provides structural context for the breakout</li> </ul> &nbsp; <p>When implementing this ADX indicator strategy, forex traders should focus first on identifying the pattern formation, then wait for both the ADX and RSI to confirm before executing the trade. This disciplined approach helps filter out false breakouts that would trigger losses with a single indicator strategy.</p> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div class="didyouknow"><a href="https://portal.thinkmarkets.com/account/individual/" style="text-decorations:none; color:inherit;" target="_blank">Add the ADX Indicator on ThinkMarkets Charts and Try Your Strategy for Free with a Demo Account!</a></div> <h2>Limitations and Considerations with the ADX</h2> <p>The ADX is a powerful trend strength indicator, but like any other indicator, it has its drawbacks. Here&rsquo;s what traders should keep in mind:</p> &nbsp; <ul> <li><strong>Inconsistency in ranging and volatile markets:</strong> The ADX is a lagging trend indicator that becomes inconsistent during periods of consolidation and volatility. Consider cross-referencing this indicator with other trading indicators and price action to gain a deeper understanding.</li> <li><strong>Timeframe considerations and parameter adjustments:</strong> The default 14-period setting may not be suitable for all time frames or markets. Test to find the sweet spot, a period that strikes a balance between speed and reliability.</li> <li><strong>Common misinterpretations:</strong> <ul> <li>Believing that a rising ADX equates to a price rise (the momentum indicator only measures trend strength, not direction)</li> <li>Assuming that a low ADX reading equates to a reversal (this doesn&#39;t always mean a trend change, it only suggests exhaustion)</li> <li>Using ADX solely for entries (the trading tool should be used as a secondary filter)</li> </ul> </li> <li><strong>Market-specific considerations:</strong> Different markets have unique characteristics that affect ADX readings: <ul> <li><strong>Forex:</strong> Generally requires higher ADX thresholds (25-30) for trend confirmation due to frequent ranging periods</li> <li><strong>Stocks:</strong> Stocks may respond better to lower ADX thresholds (20-25) depending on their volatility profiles</li> <li><strong>Commodities:</strong> Often display stronger trends with clearer ADX signals due to fundamental supply-demand dynamics</li> </ul> </li> <li><strong>Long-term reliability concerns:</strong> History shows that the ADX may be less reliable during: <ul> <li>Major economic crises when abnormal volatility disrupts trends</li> <li>Prolonged environments of low volatility when the ADX provides meaningless trend readings</li> <li>Periods that create artificial trend movements</li> </ul> </li> </ul> <h2>Is Trading with the ADX Right for You?</h2> <p>The ADX is one of the most valuable technical analysis tools for trend-following traders in the forex market. Unlike trend indicators that focus on price direction, ADX quantifies trend strength, helping trend traders:</p> &nbsp; <ul> <li>Identify strong, tradable trends</li> <li>Avoid choppy, directionless markets</li> <li>Confirm breakouts and trend continuations</li> <li>Time strategic entries and exits</li> <li>Filter out false signals when combined with other trading tools</li> </ul> &nbsp; <p>While no trading indicator is the holy grail, understanding the strengths and limitations of ADX enables trend traders to incorporate it effectively into their trading systems, especially when combined with complementary technical analysis tools.</p> &nbsp; <p>Whether you&#39;re a day trader seeking intraday momentum or a swing trader capturing larger market moves, learning the ADX momentum indicator can improve your ability to trade trends across various market conditions.</p> &nbsp; <p>Access real-time ADX data across all major currency pairs and other instruments through our advanced charting package, giving you the edge needed to identify trading opportunities in today&#39;s dynamic markets.</p>

<p>The ZigZag indicator is a technical tool used by forex traders to spot chart patterns that may have been otherwise hidden by minor price movements known as &ldquo;market noise.&rdquo;</p> &nbsp; <p>By connecting major swing highs and swing lows with trend lines, the ZigZag tool provides a clearer visual context for identifying major turning points and trend continuations. Its graphical clarity reduces trend analysis time and helps navigate through market volatility.</p> &nbsp; <p>Focusing only on meaningful price movements, the Zig Zag indicator is a popular trading tool among swing traders and trend traders. Incorporating the technical indicator into a ZigZag trading strategy can simplify trading analysis and help cut through market noise.</p> &nbsp; <p>In this short trading guide, traders will learn:</p> &nbsp; <ul> <li>What the ZigZag trading indicator is</li> <li>The trading signals provided by the market indicator</li> <li>Different trading strategies to use with the ZigZag</li> <li>Integrating the forex indicator with existing strategies</li> <li>Risk management and best practices</li> </ul> &nbsp; <p>Whether you are looking to trade trends, identify price reversals, or improve your market structure analysis, understanding the Zig Zag indicator can improve your technical trading approach and help you build a proper ZigZag trading strategy.</p> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div style="text-align: center;"> <style type="text/css">.btn { font: Figtree; justify-content: center; align-items: center; text-align: center; gap: 7px; font-style: normal; font-size: 18px; line-height: 24px; padding: 13px 20px; border: 1px solid #ddd; border-radius: 38px; background: #5EE15A; } </style> </div> <div class="didyouknow">Ready to Test Your Own ZigZag Trading Strategy?<br /> <br /> <a class="btn" href="https://portal.thinkmarkets.com/account/individual/demo" style="text-decoration: none; font-weight: 500; color: #000000; background: 5EE15A;" target="_blank">Try Here!</a> &nbsp;<br /> <br /> No Strategy? Read Along.</div> <h2>What is the ZigZag Indicator</h2> <p>The ZigZag indicator is a technical analysis tool that connects swing highs and swing lows with straight lines to filter out price moves that exceed a certain threshold.</p> <p><img alt="ZigZag Indicator - ThinkMarkets" src="/getmedia/91bf11cd-9ff2-42d2-8eea-683b68778ef3/Academy-indicators-and-patterns-zigzag-indicator-Formation-of-ZigZag-Straight-Lines.png" /></p> &nbsp; <p style="text-align: center;">Formation of ZigZag Straight Lines</p> &nbsp; <p>While primarily a lagging indicator due to plotting Ziz Zag lines after price action exceeds this threshold, when these pivot points are confirmed (i.e. when the Zig Zag line is plotted), they serve as a powerful leading trend indicator of potential future price continuation.</p> &nbsp; <p>Besides allowing traders to anticipate trend continuation as well as reversal patterns, it boasts advantages over similar trader tools like the Parabolic SAR or the Renko charts:</p> &nbsp; <ul> <li>It focuses on the magnitude of price changes, not on time intervals, which makes it more <strong>effective at identifying major market shifts</strong></li> <li>It maintains the visual context and <a href="/en/trading-academy/technical-analysis/single-candlestick-patterns-a-guide-for-day-trading/">candlestick information</a> of price charts while still filtering noise, which <strong>allows concurrent chart pattern analysis</strong></li> </ul> &nbsp; <p>The Zig Zag indicator helps <a href="/en/trading-academy/forex/">forex traders</a> in several other ways, starting with decluttering their view by highlighting cleaner price patterns while also revealing the underlying market structure and the direction of the trend.</p> &nbsp; <p>Notably, the Zig Zag indicator can assist with recognising parts of harmonics, Elliott waves and several geometry-based <a href="/en/trading-academy/technical-analysis/day-trading-chart-patterns/">chart patterns</a> due to how it marks pivot points. The term &lsquo;Zig Zag&rsquo; itself is used extensively with the Elliott Wave Theory to pinpoint corrective wave structures.</p> &nbsp; <p>This combination creates a strong framework for both forex trend analysis and tactical trade execution, which brings us to the importance of understanding how the Zig Zag tool works.</p> <h2>How the Zig Zag Indicator Works</h2> <p>The Zig Zag indicator works by identifying major swing highs or swing lows on price charts based on a defined percentage threshold or deviation set by the user.</p> &nbsp; <p>Once the price movement exceeds this threshold from the previous turning point, the forex <a href="/en/trading-academy/indicators-and-patterns/technical-indicators-beginners-guide/">technical indicator</a> draws a straight trendline connecting these two points. This process continues with each new qualifying pivot point.</p> &nbsp; <p>Here is how this looks on ThinkMarkets GBPUSD 1-day chart on TradingView:</p> <p><img alt="Zig Zag Indicator (ThinkMarkets)" src="/getmedia/5a49526d-cfce-459b-9308-8d96ec70df07/Academy-indicators-and-patterns-zigzag-indicator-on-GBPUSD-1D-chart-ThinkMarkets-TradingView.jpg" /></p> &nbsp; <p style="text-align: center;">Zig Zag Indicator on GBPUSD 1D chart, ThinkMarkets TradingView</p> &nbsp; <p>Naturally, as a technical indicator in trading, the ZigZag can achieve this by a mathematical function - i.e. a formula.</p> <h3>Zig Zag Indicator Highs and Lows Formula</h3> <p>Below is the formula of how the ZigZag indicator calculates when to plot its lines:</p> &nbsp; <p style="text-align: center;"><strong>ZigZag (HL, %change=X, retrace=FALSE, LastExtreme=TRUE)</strong></p> &nbsp; <p style="text-align: center;"><strong>If %change&gt;=X,plot ZigZag</strong></p> &nbsp; <p><strong>Where,</strong></p> &nbsp; <ul> <li><strong>HL</strong> = High/Low price series or closing price series</li> <li><strong>%change</strong> = Minimum price movement, in percentage</li> <li><strong>Retrace</strong> = Answers if change is a retracement of the previous move or an absolute change from peak to trough</li> <li><strong>Last Extreme</strong> = Answers if the extreme price is the same over multiple periods, is the extreme price the first or last observation</li> </ul> &nbsp; <p>The user has control of how the indicator plots ZigZag lines through its settings.</p> <h3>Zig Zag Indicator Settings</h3> <p>The ZigZag indicator has three primary settings:</p> &nbsp; <ol> <li><strong>Depth:</strong> Ensures swing points are major by setting a minimum number of candles</li> <li><strong>Deviation:</strong> Controls the magnitude of price movement required to plot a ZigZag</li> <li><strong>Backstep:</strong> Prevents successive pivot points from being plotted too close together</li> </ol> <p><img alt="ZigZag Indicator Default Settings (ThinkMarkets)" src="/getmedia/a0493442-2995-4046-9d8f-715a37fefbc7/Academy-indicators-and-patterns-zigzag-indicator-Settings-on-GBPUSD-1D-chart-ThinkMarkets-TradingView.jpg" /></p> &nbsp; <p style="text-align: center;">Zig Zag Indicator Settings on GBPUSD 1D chart, ThinkMarkets TradingView</p> &nbsp; <p>Each component of the ZigZag trading indicator functions differently, implying a particular impact during trading.</p> &nbsp; <p>Next is a summary of the ZigZag settings, what each component does and how changing settings can impact trading.</p> <p><img alt="Zig Zag Indicator Trading Signals (ThinkMarkets)" src="/getmedia/6913c198-8c6b-4534-b770-eef0099e6fb8/Academy-indicators-and-patterns-zigzag-indicator-Trading-Signals-ThinkMarkets.png" /></p> &nbsp; <p style="text-align: center;">Zig Zag Indicator Components and How They Function</p> &nbsp; <p>The deviation is a key parameter in the Zig Zag indicator&#39;s formula, as it is mainly responsible for how sensitive the indicator is. Generally, the accepted range is 5-15%, where the higher the figure is, the less sensitive the indicator is, which results in filtering out more noise.</p> &nbsp; <p>As a point of reference, scalpers and day traders could aim for 3-5%; in swing trading, traders may target 5-8%; long-term or position traders may opt for 10-15%. However, slight adjustments should be considered in the dynamic forex markets based on the trading session and the forex pair one trades.</p> <h2>What Are the Main Trading Signals of the ZigZag Indicator</h2> <p>The ZigZag indicator provides traders with objective signals by identifying significant price movements and filtering out minor fluctuations. These signals are not direct buy or sell recommendations but rather tools to interpret market structure and plan trades.</p> &nbsp; <p>The Zigzag trading indicator generates three actionable signals (with insights), acting as a trend reversal and ​trend trading indicator:</p> &nbsp; <ol> <li><strong>Trend reversals</strong> at major swing highs and lows</li> <li><strong>Trend continuations</strong> based on the direction of the ZigZag lines</li> <li><strong>Trend momentum</strong> gauged by length and angle of the ZigZag lines (used when trend trading)</li> </ol> &nbsp; <p>Let us take a closer look at each one separately.</p> <h3>1. Zig-Zag Indicator Trend Reversal</h3> <p>The ZigZag pivot points mark significant reversal points, often aligning with key support and resistance levels. Traders can use pivot points to set stop-loss or profit-taking levels below swing lows (for long trades) or above swing highs (for short trades).</p> <p><img alt="ZigZag Trend Reversal Trade (ThinkMarkets)" src="/getmedia/fc2af4e6-e8e7-40bc-ba03-45a385c4da74/Academy-indicators-and-patterns-zigzag-indicator-Major-Trend-Reversal-Example-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">Major Trend Reversal Example, GBPUSD 1D Chart</p> &nbsp; <p>For intermediate traders, the structures that form at swing highs and lows can be used to make Elliott wave patterns or harmonic patterns easier to identify.</p> &nbsp; <p>On the advanced patterns front, when similar Zig Zag patterns appear, it suggests market rhythm or symmetry, which can be used to inform speculation about future price movements.</p> <h3>2. Zig-Zag Indicator Trend Continuation</h3> <p>The ZigZag reveals a clear market structure by showing higher highs and higher lows in uptrends or lower highs and lower lows in downtrends, confirming the prevailing trend direction. This implies it can be used as a trend following indicator.</p> &nbsp; <p>Notably, when a new ZigZag pivot forms, it signals that the price has reversed by the specified percentage threshold, which can be used as a trend confirmation signal at early turning points. Naturally, the pivot points act as breakout zones in trend continuations.</p> <p><img alt="ZigZag Trend Continuation Trade (ThinkMarkets)" src="/getmedia/c9bede24-f5f0-4457-9622-7e87915be309/Academy-indicators-and-patterns-zigzag-indicator-Trend-Reversal-Turns-into-Trend-Continuation-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">Trend Reversal Turns into Trend Continuation, GBPUSD 1D Chart</p> <h3>3. Zig-Zag Indicator Trend Momentum</h3> <p>Longer ZigZag lines indicate stronger momentum, and shorter consolidation or trend exhaustion. On the other hand, steeper angles suggest strong momentum, while flatter angles may indicate trend exhaustion or reversal potential.</p> &nbsp; <p>In the GBPUSD 1D example below, an angle of 70.68 produced a 420 pips whereas an angle of 73.12 produced 727 pips, nearly twice.</p> <p><img alt="ZigZag Trend Momentum (ThinkMarkets)" src="/getmedia/e91552df-fd77-4a35-8cb0-f28fa3dda957/Academy-indicators-and-patterns-zigzag-indicator-Steeper-Angle-Produces-More-Gains-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ZigZag Steeper Angle Produces More Gains, GBPUSD 1D Chart</p> &nbsp; <p>The ZigZag length and angle also simplify the process of measuring the required Fibonacci retracement and extension levels. This aids in timing trades.</p> &nbsp; <p>For example, a 10% ZigZag pattern on a weekly chart can reveal the overall trend, while smaller settings, such as 5% on daily charts or 3% on 4-hour charts, may help traders identify shorter-term moves and refine entries.</p> <h2>Examples of ZigZag Trading Strategies</h2> <p>Building on our understanding of the ZigZag trading indicator signals, let us explore two practical trading strategies designed to capitalise on reversals and continuations (with momentum confirmation).</p> <h3>Swing Reversal ZigZag Trading Strategy</h3> <p>Here, traders use the indicator to clearly identify swing highs and swing lows, then trade reversals at those points when confirmed by other indicators or <a href="/en/trading-academy/forex/using-candlestick-patterns-in-forex-day-trading/">candlestick patterns</a>.</p> &nbsp; <p>This ZigZag strategy works best in ranging markets or at the potential end of extended trends, where a reversal is more likely.</p> &nbsp; <p><strong>How It Works:</strong></p> &nbsp; <ul> <li><strong>Identify a Significant Pivot Point:</strong> Wait for the ZigZag to mark a swing low or swing high (visible V-shape and inverted V-shape patterns that often appear in <a href="/en/trading-academy/technical-analysis/what-is-the-dead-cat-bounce-pattern-and-how-to-identify-it/">Dead Cat Bounces</a>).</li> <li><strong>Confirm the Reversal:</strong> Look for confirmation signals such as: <ul> <li>Bullish candlestick patterns (hammer, <a href="/en/trading-academy/technical-analysis/using-double-candlestick-patterns-in-day-trading/">engulfing</a>) at swing lows</li> <li>Bearish candlestick patterns (shooting star, engulfing) at swing highs</li> <li>RSI showing oversold conditions (below 30) at swing lows or overbought (above 70) at swing highs</li> </ul> </li> <li><strong>Execute the Trade:</strong> <ul> <li><strong>For long trades:</strong> Enter after confirmation near the swing low</li> <li><strong>For short trades:</strong> Enter after confirmation near the swing high</li> <li>Set stop-loss just below the recent swing low (for longs) or above the swing high (for shorts)</li> <li>Initially, target the previous swing point, the RSI overbought/oversold</li> </ul> </li> <li><strong>Manage the Position:</strong> <ul> <li>Consider partial profit-taking at the halfway point to the target</li> <li>Trail stops as price moves favorably to lock in profits</li> </ul> </li> </ul> &nbsp; <p>In the GBPUSD 1D long example below, using this method resulted in a gain with a risk-reward ratio of approximately 2x:</p> &nbsp; <ul> <li><strong>Take Profit:</strong> when the RSI closes in the overbought region near 1.29</li> <li><strong>Stop loss:</strong> 30 pips below the last ZigZag swing, measured near 1.22</li> </ul> <p><img alt="ZigZag Trend Trade (ThinkMarkets)" src="/getmedia/beb3f04d-0907-4a03-8569-99fd5f525102/Academy-indicators-and-patterns-zigzag-indicator-RSI-Reversal-Long-Trade-with-Trend-Confirmation-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ZigZag RSI Reversal (Long) Trade with Trend Confirmation, GBPUSD 1D Chart</p> <h3>Trend Following ZigZag Trading Strategy</h3> <p>This strategy combines the ZigZag&#39;s trend signal with trendline analysis to capture continuation moves after pullbacks. It works best in trending markets with regular pullbacks, particularly effective on daily and 4-hour charts.</p> &nbsp; <p><strong>How It Works:</strong></p> &nbsp; <ul> <li><strong>Identify the Dominant Trend:</strong> Use this indicator to confirm higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend).</li> <li><strong>Draw Trendlines:</strong> Connect consecutive ZigZag swing highs (for downtrends) or swing lows (for uptrends).</li> <li><strong>Wait for a Pullback:</strong> Look for a counter-trend move that pulls back to the ZigZag lines or forms a new ZigZag leg against the trend.</li> <li><strong>Enter on Continuation Confirmation:</strong> <ul> <li><strong>For uptrends:</strong> Enter long when price bounces off trendline support or breaks above a minor high</li> <li><strong>For downtrends:</strong> Enter short when price rejects from trendline resistance or breaks below a minor low</li> <li>Confirm with volume increase or momentum indicator alignment (MACD crossover)</li> <li>Place a stop-loss beyond the most recent counter-trend ZigZag pivot</li> </ul> </li> <li><strong>Monitor Zigzag Momentum Signals:</strong> <ul> <li>Watch for ZigZag line characteristics during the trade</li> <li><strong>Strong momentum:</strong> long ZigZag legs with steep angles in trend direction</li> <li><strong>Weakening momentum:</strong> shorter ZigZag legs with flatter angles</li> <li><strong>Warning sign:</strong> counter-trend ZigZag moves deepening beyond 50% retracement</li> </ul> </li> <li><strong>Take Profit Approaches:</strong> <ul> <li>Use Fibonacci extensions (127.2% or 161.8%) of the pullback move</li> <li>Target the length of the previous ZigZag leg in the trend direction</li> <li>Implement a trailing stop based on subsequent ZigZag pivots</li> <li>Consider scaling out when ZigZag momentum shows signs of weakening</li> </ul> </li> </ul> &nbsp; <p>In the GBPUSD 1D short example below, using this method resulted in a gain with a risk-reward ratio of approximately 2x:</p> &nbsp; <ul> <li><strong>Take Profit:</strong> at 161.8% of the prior major Zig Zag near 1.21</li> <li><strong>Stop loss:</strong> 30 pips above the last ZigZag swing, measured near 1.3070</li> </ul> <p><img alt="Zig Zag Trend Trade (ThinkMarkets)" src="/getmedia/2ee9b913-9226-4886-809f-50ca2c4203cb/Academy-indicators-and-patterns-zigzag-indicator-Trend-Continuation-Short-Trade-with-MACD-Confirmation-GBPUSD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">Zig Zag Trend Continuation (Short) Trade with MACD Confirmation, GBPUSD 1D Chart</p> &nbsp; <p>By keeping a close eye on the length, angle, and pattern of ZigZag lines throughout a trade, traders can manage their positions more effectively, hold through periods of strong momentum and reduce exposure when momentum begins to wane.</p> <h3>Additional ZigZag Trading Strategies</h3> <p>Beyond these three core strategies, traders often implement several other ZigZag-based approaches:</p> &nbsp; <ol> <li><strong>Fibonacci Confluence Strategy:</strong> Uses ZigZag pivot points as anchors for Fibonacci retracement and extension levels to identify precise entry and exit points during trends.</li> <li><strong>ZigZag Channel Trading:</strong> Forms price channels by connecting consecutive ZigZag swing highs and lows, then trades bounces within the channel or breakouts from it.</li> <li><strong>Pattern Recognition Strategy:</strong> Uses the ZigZag to more clearly visualise classic chart patterns like double top and double bottom patterns, head and shoulders, or <a href="/en/trading-academy/technical-analysis/using-double-candlestick-patterns-in-day-trading/">triangles</a> that might be obscured in noisy price action.</li> <li><strong>Elliott Wave Analysis:</strong> Leverages the ZigZag&#39;s filtering capability to more accurately count waves and identify potential market reversals.</li> </ol> &nbsp; <p>Each of those ZigZag trading strategies can be adjusted based on trading style, risk tolerance, and the markets one trades.</p> <h2>How to Use the Zig Zag Indicator In A Strategy</h2> <p>The process of integrating the ZigZag trading indicator into a trading strategy involves the following steps:</p> &nbsp; <p><strong>Step 1 - Select the Indicator:</strong> Add the Zigzag from the indicator list.</p> &nbsp; <p><strong>Step 2 - Set Initial Parameters:</strong> Set the deviation at a 5% threshold for a balanced view (or use trading platform default settings).</p> &nbsp; <p><strong>Step 3 - Adjust Visual Properties:</strong> Adjust visuals; line colour, thickness, and style for clear chart reading.</p> &nbsp; <p><strong>Step 4 - Fine-Tune Settings:</strong> Adjust depth, deviation, and backstep parameters according to your target market and timeframe.</p> &nbsp; <p><strong>Step 5 - Analyse Price Structure:</strong> Monitor how the indicator connects recent highs and lows, focus on swing patterns, trend direction and potential reversal zones, and pay attention to ZigZag characteristics (length, angle, pattern) that may suggest trend continuation or exhaustion.</p> &nbsp; <p><strong>Step 6 - Plan Your Trade:</strong> Align entries with additional confirmation tools, such as support/resistance levels, momentum indicators, or candlestick patterns. Set logical stop-loss levels near recent ZigZag pivots and determine take-profit targets based on previous ZigZag waves or Fibonacci levels.</p> &nbsp; <p>A part of integrating the ZigZag into a trading strategy, as revealed in step 4, is adjusting its settings based on the forex pair one trades.</p> <h2>Adjusting Settings for Different Forex Markets</h2> <p>This allows traders to align the forex trading indicator with their own volatility levels and price behaviour.</p> &nbsp; <p>Here are examples of settings to use for all three pair types (of course, one can create their own), along with the rationale behind the changes:</p> <p><img alt="ZigZag Indicator Forex Settings (ThinkMarkets)" src="/getmedia/96d3bde3-890c-4b60-967d-5aa7fd952d45/Academy-indicators-and-patterns-zigzag-indicator-Forex-Settings-ThinkMarkets.png" /></p> &nbsp; <p style="text-align: center;">Adjusting ZigZag Indicator Settings for Forex</p> &nbsp; <p><strong>Major pairs:</strong> Less volatile, highly liquid markets require moderate settings to identify meaningful swings without excessive filtering. The backstep ensures the indicator doesn&rsquo;t plot two swing highs or lows too close together, which keeps the structure of the ZigZag lines clear and readable.</p> &nbsp; <p><strong>Cross pairs:</strong> Higher volatility needs slightly increased thresholds to filter minor price fluctuations. Slightly higher settings smooth out market noise while maintaining responsiveness.</p> &nbsp; <p><strong>Exotic pairs:</strong> Extreme volatility requires more aggressive filtering to identify truly significant price movements. Wider ZigZag parameters help the indicator identify only significant turning points in these unpredictable markets.</p> &nbsp; <p>Naturally, another consideration for integrating the ZigZag into a strategy is the timeframes.</p> <h3>Timeframe Considerations</h3> <p>Different timeframes serve distinct trading objectives when using the ZigZag indicator:</p> &nbsp; <ul> <li><strong>Lower timeframes (15M-1H):</strong> The indicator can be used with tighter settings for intraday trading, though they contain more noise</li> <li><strong>4-Hour charts:</strong> Provide frequent trading opportunities while maintaining reasonable signal reliability</li> <li><strong>Daily charts:</strong> Offer excellent balance between signal quality and timeliness for most ZigZag strategies</li> <li><strong>Weekly charts:</strong> Ideal for identifying major trend changes and suited for position trading</li> </ul> &nbsp; <p>Swing traders typically find the 4H and daily timeframes most effective, while position traders benefit from weekly chart analysis. For a comprehensive approach, consider using multiple timeframes with coordinated ZigZag settings to confirm reversal and trend signals across different time perspectives.</p> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div style="text-align: center;"> <style type="text/css">.btn { font: Figtree; justify-content: center; align-items: center; text-align: center; gap: 7px; font-style: normal; font-size: 18px; line-height: 24px; padding: 13px 20px; border: 1px solid #ddd; border-radius: 38px; background: #5EE15A; } </style> </div> <div class="didyouknow">Test Your Forex ZigZag Strategy on ThinkMarkets TradingView<br /> <br /> <a class="btn" href="https://portal.thinkmarkets.com/account/individual/demo" style="text-decoration: none; font-weight: 500; color: #000000; background: 5EE15A;" target="_blank">Here!</a></div> <h2>Integrating the ZigZag Trading Indicator into Your Strategy</h2> <p>To demonstrate how to integrate the ZigZag trading indicator into your trading strategy effectively, let us examine a couple of key application scenarios.</p> <h3>Trend-Following ZigZag Strategy with EMA and RSI Technical Indicators</h3> <p>This example shows how to use the ZigZag indicator to improve a classic trend following strategy on the USDCAD 1D chart, using the <a href="/en/trading-academy/indicators-and-patterns/rsi-indicator/">Relative Strength Index</a> (RSI) and the Exponential Moving Average (EMA).</p> &nbsp; <p>Setup: ZigZag (14 depth, 5% deviation, 5 backsteps) + 100 EMA + RSI (14)</p> <p><img alt="ZigZag Trading Strategy (ThinkMarkets)" src="/getmedia/4ebea59f-47e0-40c6-92ae-5b4aeafb314c/Academy-indicators-and-patterns-zigzag-indicator-Strategy-with-EMA-and-RSI-Confirmation-USDCAD-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">Zig Zag Strategy with EMA and RSI Confirmation, USDCAD 1D Chart</p> &nbsp; <p><strong>Signal:</strong></p> &nbsp; <ul> <li>ZigZag confirmed a higher high and higher low, validating the uptrend</li> <li>Price pulled back and held the 100 EMA dynamic support zone at 1.35, forming a ZigZag low</li> <li>RSI dipped below 50 and then reversed, showing a momentum shift</li> </ul> &nbsp; <p><strong>Trade Execution:</strong></p> &nbsp; <ul> <li><strong>Entry:</strong> After ZigZag marked a higher low, entry on the first bullish candle that aligned with the RSI momentum shift (1.3570)</li> <li><strong>Stop-loss:</strong> Placed 30 pips below the most recent swing low (1.3385)</li> <li><strong>Take-profit:</strong> Price closing in RSI overbought region (1.3880)</li> </ul> &nbsp; <p>Using this method resulted in a gain with a risk-reward ratio of approximately 1.7x.</p> &nbsp; <p>This ZigZag strategy combined trend structure (from ZigZag), dynamic support (from EMA), and momentum confirmation (from RSI) to create a high-probability entry.</p> <h3>Reversal ZigZag Strategy with EMA and MACD Technical Indicators</h3> <p>This reversal trading strategy example demonstrates how to identify potential turns at major points, using CAD/JPY, which formed a double top on the daily chart.</p> &nbsp; <p><strong>Setup:</strong> ZigZag (20 depth, 8 deviation, 7% backsteps) + MACD</p> <p><img alt="Zig Zag Trading Strategy (ThinkMarkets)" src="/getmedia/67cebbb7-063c-4c3a-a580-2a16bdd4901b/Academy-indicators-and-patterns-zigzag-indicator-Strategy-with-EMA-and-MACD-Confirmation-CADJPY-1D-Chart-1.jpg" /></p> &nbsp; <p style="text-align: center;">ZigZag Strategy with EMA and MACD Confirmation, CADJPY 1D Chart</p> &nbsp; <p><strong>Signal:</strong></p> &nbsp; <ul> <li>ZigZag clearly delineated a double top formation (M pattern)</li> <li>The MACD histogram and lines turned negative, confirming a momentum shift</li> <li>The market slid below the 100 EMA to confirm a trend change from bullish to bearish</li> </ul> &nbsp; <p><strong>Trade Execution:</strong></p> &nbsp; <ul> <li><strong>Entry:</strong> Short position when the price broke below the recent ZigZag low (104.70)</li> <li><strong>Stop-loss:</strong> Placed 30 pips above the 100 EMA (106.15)</li> <li><strong>Take-profit:</strong> The height of the double top pattern projected downward from the breakout point (length of 110.50 to 104.70 from breakout point -&gt; 98.90)</li> </ul> &nbsp; <p>As with the previous example, this position combined the ZigZag&#39;s ability to outline patterns, an EMA trend change and MACD momentum confirmation, resulting in a trade that offered a nearly 4x risk:reward.</p> <h2>Risk Management and Best Practices to Use ZigZag</h2> <p>While the Zig Zag indicator is often used as a trading analysis tool, it has its drawbacks.</p> &nbsp; <p>For starters, the indicator lags. This means that ZigZags appear some time after the price has exceeded the threshold. Relying solely on it would result in trends that have already moved substantially, which supports the idea of confirming trends.</p> &nbsp; <p>Another downside is how susceptible the trading tool can be to false signals or whipsaws, especially in volatile forex markets. To mitigate these effects:</p> &nbsp; <ul> <li><strong>Adjust Settings:</strong> Increase the deviation percentage threshold to reduce sensitivity to minor price fluctuations</li> <li><strong>Combine with Other Indicators:</strong> Use the ZigZag trading indicator with other complementary forex tools like the RSI or the MACD for confirmation</li> <li><strong>Confirm with Volume:</strong> Analyse real trading volume to confirm the strength of a trend</li> <li><strong>Use Whipsaw Filters:</strong> Use other types of indicators that help identify and filter out whipsaw patterns</li> </ul> &nbsp; <p>Due to these drawbacks, prudent position sizing is crucial. Traders should risk a small percentage (ideally 1-2%) of their trading capital for every position to ensure a minimal and manageable drawdown.</p> <h2>Common Trader Mistakes with the Zig Zag Indicators</h2> <p>Traders should be aware of the following mistakes when using the ZigZag indicator:</p> &nbsp; <ul> <li><strong>Ignoring the broader market context:</strong> Focusing exclusively on ZigZag patterns without considering the overall market trend can result in misguided trades. Always analyse the prevailing market direction alongside ZigZag signals.</li> <li><strong>Using inappropriate settings for different timeframes:</strong> Applying uniform settings across different timeframes or assets leads to inaccurate representations. Higher timeframes generally require larger deviation settings.</li> <li><strong>Failing to wait for pattern confirmation:</strong> The ZigZag indicator can redraw its lines as new price data becomes available. Acting on a pattern before it is fully formed can lead to trades based on incomplete information.</li> <li><strong>Neglecting to adjust for market conditions:</strong> Market volatility varies across different assets and timeframes. Using static ZigZag settings without adjusting for these variations can result in missed opportunities or false signals.</li> </ul> &nbsp; <p>Understanding the importance of avoiding these actions can help many traders make more informed live trading decisions when using the tool.</p> <h2>Conclusion</h2> <p>The Zig Zag indicator is a tool used by many traders to filter out market noise by highlighting major turning points and potential continuations in trend direction. Its visual clarity allows forex traders to analyse market structures more easily and aid in technical nature decisions.</p> &nbsp; <p>When applying a ZigZag trading strategy, remember these key principles:</p> &nbsp; <ul> <li>Use the tool as part of a complete trading system, not in isolation</li> <li>Combine its signals with momentum analysis and breakout patterns for confirmation</li> <li>Adjust settings as market conditions and volatility change</li> <li>Apply proper risk management with appropriate stops near ZigZag points</li> </ul> &nbsp; <p>However, whether you use the ZigZag indicator as a reversal or trend tool, or count Elliott waves, to integrate it into your trading toolbox properly, you must master both its strengths and limitations. The Zig Zag indicator does not predict the future after all.</p> <div>&nbsp;</div>

<p>Forex economic indicators are statistical measurements traders use as fundamental tools to gain an edge around the release of high-impact news reports. They are a telltale of the economic health of a country. As such, they provide insights into the direction of its currency, which ultimately impacts forex trading.</p> &nbsp; <p>Released by governments and private organisations at scheduled intervals, these forex market indicators of economic health often set off significant market activity across currency pairs, averaging around 70 pips in certain cases. A UC Berkeley research paper validates that <a href="https://scholar.harvard.edu/files/fedyk/files/afedyk_newsdriventrading.pdf" target="_blank">trading volumes increase substantially</a>, though the study focused on the ten minutes following an economic news release.</p> &nbsp; <p>Nonetheless, traders often anticipate large price moves and position ahead of economic reports to capitalise on the increase in volatility. However, volatility carries significant risks in forex trading and can lead to depletion of a trading account without the ability to make informed trading decisions.</p> &nbsp; <p>To support those who want to learn forex trading with a focus on economic calendar events while also managing risk, this article explores:</p> &nbsp; <ul> <li>The major forex economic indicators and how they impact FX trade</li> <li>Which economic indicators matter most for specific currency pairs</li> <li>How to design effective forex trading strategies for these releases</li> <li>Lessons from the history where reports sparked volatility</li> <li>A step-by-step process for developing effective trading strategies</li> </ul> &nbsp; <p>Let&#39;s begin by examining the economic indicators that have the greatest impact on the forex markets.</p> <h2>Which Key Economic Indicators Impact Forex Markets Most</h2> <p>Currency markets can be sensitive to the relative country&#39;s economic data releases, with specific readings often having a substantial impact on currency trading. Understanding which important economic events impact the world of forex most is crucial for trading success.</p> &nbsp; <p>On the one hand, high-impact economic indicators are essential to understand in <a href="/en/trading-academy/forex/">forex trading</a>. They can affect the forex market as they supply insights into monetary policy moves. On the other hand, low-impact types of economic indicators may go unnoticed.</p> &nbsp; <p>One way to discover how economic indicators impact currency values is to identify market-moving events on a trading calendar. You can filter these by event, country, region, and importance, utilising the <a href="/en/economic-calendar/">ThinkMarkets forex economic calendar</a>.</p> <p><img alt="Forex Economic Calendar (ThinkMarkets)" src="/getmedia/d7747535-6e80-4824-aead-991901ac7686/Academy-Indicators-and-patterns-Forex-Economic-Indicators-High-Importance-Forex-Economic-Events-G7-ThinkMarkets-Trader-Platform-Calendar.jpg" /></p> &nbsp; <p style="text-align: center;">High Importance Forex Economic Events, G7, ThinkMarkets Trader Platform Calendar</p> &nbsp; <p>The following hierarchy is designed to help traders prioritise economic indicators that most impact the forex market, with particular attention needed for those listed on the left.</p> <p><img alt="Most Impactful Economic Data Releases" src="/getmedia/f1a60266-5f69-428c-b3f3-084b95eafbea/Academy-Indicators-and-patterns-Forex-Economic-Indicators-Most-Impactful-Economic-Data-Releases.jpg" /></p> &nbsp; <p style="text-align: center;">Most Impactful Economic Data Releases</p> &nbsp; <p>High-impact economic indicators are key data releases with the most impact on forex, which include:</p> <h3>1. Interest Rate Decisions by Central Banks</h3> <p>They are the most influential market drivers, although their impact on currency movements has diminished over the years of the high-interest-rate environment. When major central banks like the Federal Reserve (FED), European Central Bank (ECB) or Bank of England (BOE) announce policy changes, markets often react with instant volatility. A surprise rate hike typically strengthens the relative currency value as higher rates attract foreign capital. But it is not only the actual decision that moves markets. Other related events used as trading signals are:</p> &nbsp; <ul> <li><strong>Forward Guidance:</strong> It often presents trading opportunities as central bank members hint about future policy direction and may cause repricing of the exchange rate. Typical places for insights are the press conferences after major decision announcements.</li> <li><strong>Meeting Minutes:</strong> They might shake up markets, particularly when they reveal dissenting views or shifting sentiment among policymakers.</li> <li><strong>Interest Rate Differentials:</strong> They reveal divergence between economies&#39; monetary policies and may create carry trade opportunities as some central banks raise or cut rates more aggressively.</li> <li><strong>Quantitative easing (QE) and tightening (QT):</strong> They may completely turn around the underlying trend, as they dictate money supply and long-term bond yield demand.</li> </ul> <h3>2. Employment Data</h3> <p>The job market often moves currency pairs, with the extent depending on the granularity of various economic conditions. If we use the US labour market as an economic indicator example, which is the biggest labour market in the world, the most important components are:</p> &nbsp; <ul> <li><strong>Non-Farm Payrolls (NFP):</strong> This is one of <a href="/en/trading-academy/market-events/trading-the-non-farm-payroll-nfp-report/">the most influential US datasets</a> for traders, consistently triggering volatility upon release. The headline figure, which measures the change in employed people excluding agricultural workers, acts as a crucial barometer of the world&#39;s largest economy.</li> <li><strong>Unemployment Rate:</strong> It may need to be analysed alongside the participation rate. For example, a declining unemployment rate paired with falling participation often signals that discouraged workers are dropping out rather than indicating overall economic strength.</li> <li><strong>Average Hourly Earnings:</strong> They are important as policymakers focus on wage growth as a leading indicator of inflationary pressures.</li> <li><strong>ADP private employment report, JOLTS job openings and weekly jobless claims:</strong> These also build up expectations in the days leading up to the NFP release, with jobless claims guiding expectations week in and week out.</li> </ul> &nbsp; <p>Remember that a strong NFP where the actual numbers substantially beat estimates typically strengthens the US dollar due to expectations of economic growth and tighter monetary policy.</p> &nbsp; <p>The last NFP report beat estimates by just 9,000 jobs, resulting in around 60 pips in EURUSD volatility. However, historical events on the ThinkMarkets advanced calendar shows an average range of over 70 pips. The small discrepancy of 9,000 jobs reduced the impact on the forex pair.</p> <p><img alt="Impact of NFP on EURUSD (ThinkMarkets)" src="/getmedia/60e0d82c-e25d-4d61-a767-a637c0eba08c/Academy-Indicators-and-patterns-Forex-Economic-Indicators-NFP-Produces-70-pips-on-Average-on-EURUSD.jpg" /></p> &nbsp; <p style="text-align: center;">NFP Produces 70 pips on Average on EURUSD</p> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div class="didyouknow">Try our NFP calendar and gauge the potential for price movements <a href="https://portal.thinkmarkets.com/account/individual/">here!</a></div> <h3>3. Inflation Data</h3> <p>Inflation measures the price pressures within a country&#39;s economic performance, which often leads to speculation on forward guidance. A higher inflation print often leads to support for the currency as traders anticipate hikes or at least a hawkish stance by the bank.</p> &nbsp; <ul> <li><strong>Consumer Price Index (CPI):</strong> It typically draws the most attention in the world of forex trading, with headline CPI capturing cost-of-living changes, and core CPI (which excludes volatile food and energy prices) providing a signal of persistent pressures.</li> <li><strong>Producer Price Index (PPI):</strong> It measures price changes from the seller&#39;s perspective and acts as a leading indicator for CPI, as higher production costs filter through to consumer prices with a lag of several months.</li> <li>Market participants also focus on <strong>forward-looking Inflation Expectations</strong>, measured through surveys and inflation swaps, which can trigger strong FX movements when they change suddenly.</li> <li><strong>Personal Consumption Expenditures (PCE) Price Index:</strong> It has become the Fed&#39;s preferred inflation gauge because its methodology differs from CPI by accounting for substitution effects as consumers adjust spending patterns in response to price changes, providing what many economists consider true inflation.</li> </ul> <h3>4. Gross Domestic Product (GDP)</h3> <p>Forex economic indicators such as GDP measure economic activity, and their impact can be significant, especially when the figures deviate from forecasts.</p> &nbsp; <ul> <li><strong>Advance GDP estimate:</strong> It is an indicator of economic growth and provides the first glimpse of economic performance, while the <strong>Preliminary estimate</strong> follows a month later with more refined data to validate economic stability. The <strong>Final release</strong> is released another month later, but usually triggers little interest unless it shows dramatic revisions.</li> <li>Traders sift through this data for signs of economic cycle transitions. For instance, two consecutive quarters of negative economic growth may signal a <strong>recession</strong> and economic weakness. High inflation and little growth would point to<strong> stagflation</strong>, an infamously challenging environment for central banks and currency stability.</li> <li><strong>Consumer Spending</strong> is an important component, as it contributes over 70% to the growth of developed economies. Business investment figures would signal corporate confidence and future productivity growth. Government spending changes can impact currencies of countries with large public sectors, while the net exports component may influence commodity currencies and nations heavily dependent on international trade.</li> <li><strong>GDP price deflator</strong> is deemed as an inflation gauge, and quarter-on-quarter annualised growth rates can reveal emerging economic trends.</li> </ul> &nbsp; <p>However, not all are important forex economic indicators as they are not created equal. Some are categorised as leading or lagging, each delivering different insights into the economic performance of a country.</p> <h2>What Are Leading and Lagging Economic Indicators in Forex</h2> <p>Leading indicators act as an economic weather forecast and lagging indicators as a confirmation. Let&rsquo;s take a closer look at each one.</p> <h3>Leading Economic Indicators</h3> <p>Leading economic indicators are forward&ndash;looking indicators for forex trading, as they allow traders to use them as early warnings to position themselves before major economic shifts.</p> <p><img alt="Leading Economic Indicators Forex (ThinkMarkets)" src="/getmedia/f2810c10-76b6-4275-9a7b-648ce8777c74/Academy-Indicators-and-patterns-Forex-Economic-Indicators-Lagging-Economic-Indicators.png" /></p> &nbsp; <p style="text-align: center;">Leading Economic Indicators in the Forex Market</p> &nbsp; <p><strong>Purchasing Managers&#39; Index (PMI):</strong> It is published monthly for manufacturing and services sectors, with readings above 50 signalling positive economic expansion, while those below 50 point to contraction. They provide early insights into GDP growth, employment trends and business sentiment. When the PMI figures of a country consistently beat expectations, its currency typically strengthens as investors bet on the improving economic outlook.</p> &nbsp; <p><strong>Consumer Confidence Index:</strong> This index measures how optimistic consumers feel about the state of the economy. It is crucial for forex traders because consumer spending accounts for a large portion of GDP in developed economies. A high reading often means increased spending, which drives economic growth.</p> &nbsp; <p><strong>Building Permits and Housing Starts:</strong> They offer insights into the construction sector and broader economic activity. They tend to rise during economic booms and fall during downturns. These figures can have a big impact on currency markets for currencies like the Australian dollar, where housing plays an important role in the economy.</p> &nbsp; <p><strong>Retail Sales:</strong> These economic indicators include patterns of consumer spending. Upbeat numbers imply growth and could lead to currency appreciation, while poor readings might prompt traders to sell a currency on an anticipated economic slowdown.</p> &nbsp; <p><strong>Yield curve analysis:</strong> The yield curve is a powerful tool for gauging economic health, as inverted curves, where short-term rates climb above long-term ones, may predict a <strong>recession</strong>. However, months of lag between an inversion and the actual recession mean that it is mostly useful in long-term trading. Still, a steepening curve in one country against a flattening curve in another points to diverging interest rates that may create trading opportunities.</p> <h3>Lagging Economic Indicators</h3> <p>Lagging economic indicators play a role in confirming established trends and provide evidence of the current state of an economy. They are backward-looking indicators, often validating the leading data, which is crucial for making informed trading decisions.</p> <p><img alt="Lagging Economic Indicators Forex (ThinkMarkets)" src="/getmedia/5b2fa657-4f72-4ea0-9b5c-6f88b4212f74/Academy-Indicators-and-patterns-Forex-Economic-Indicators-lagging-indicators.png " /></p> &nbsp; <p style="text-align: center;">Lagging Economic Indicators in Forex</p> &nbsp; <p><strong>Trade Balance:</strong> A popular economic indicator in 2025, the trade balance shows the difference between a country&#39;s goods exports and imports. A surplus generally supports currency strength, while a deficit may weaken it. The market reaction depends on how the actual figures stack against expectations and the broader economic context. For export-dependent economies like Japan and Germany, the trade balance can have a direct impact on market sentiment.</p> &nbsp; <p><strong>Industrial Production:</strong> It helps confirm economic trends. Manufacturing output measures production, and unexpected contractions may cause currency weakness, while capacity utilisation rates provide insights into inflationary pressures. These readings may signal broader economic turns, even though industrial production accounts for a low share of developed economies.</p> <h2>Which Forex Economic Indicators Impact Currency Pairs Most</h2> <p>All traders closely monitor data from the US, the world&rsquo;s largest economy, with the dollar serving as the primary reserve currency. Other country-specific indicators affect their respective currencies and provide relevant context. The table below lists data that matters to major currency pairs:</p> <p><img alt="List of Key Economic Indicators Moving Major Forex Pairs" src="/getmedia/5a8abddc-b928-41fb-a4ef-950a931fe04c/Academy-Indicators-and-patterns-Forex-Economic-Indicators-List-of-Key-Economic-Indicators-Moving-Major-Forex-Pairs.png" /></p> &nbsp; <p style="text-align: center;">List of Key Economic Indicators Moving Major Forex Pairs</p> &nbsp; <p>These relationships are not static and can evolve over time based on a mix of market sentiment, changes in macroeconomic indicators and shifting risk appetite. For example, coordinated central bank policy changes or a flight to safety may drive market dynamics in a more meaningful way. However, theory alone isn&#39;t sufficient&mdash;examining historical examples offers valuable lessons on how economic surprises can create big market reactions.</p> <h2>Examples of How Economic Indicators Impact the Forex Market</h2> <p>Traders must beware that economic events coined as &ldquo;Black Swan&rdquo; might trigger seismic market shifts, where liquidity dries up, leading to gaps and slippage that go beyond stop losses. Below are announcements that sparked extraordinary price movements in the past.</p> <h3>Swiss National Bank Removes Euro Peg (January 2015)</h3> <p>Probably the most dramatic policy announcement in recent forex history occurred on 15th January 2015, when the Swiss National Bank (SNB) unexpectedly abandoned its 1.20 floor on the EUR/CHF exchange rate. Within minutes, the Swiss franc soared by 30% across the board, sending USD/CHF and other CHF pairs into an abyss.</p> <p><img alt="Swiss Franc Shock (ThinkMarkets)" src="/getmedia/c66581cc-8a74-4b5e-80f8-1d7d8dfd342c/Academy-Indicators-and-patterns-Forex-Economic-Indicators-EURCHF-Crashes-30-After-Discontinuing-Euro-Peg-Jan-2015.jpg" /></p> &nbsp; <p style="text-align: center;">EURCHF Crashes 30% After Discontinuing Euro Peg, Jan 2015</p> &nbsp; <p>The result was nothing short of catastrophic as several forex brokers went bust, unable to cover their clients&rsquo; massive losses, while some major banks reported eight-figure holes on their books.</p> &nbsp; <p>The key lesson here is that central bank credibility and communication can dramatically impact markets, and when they act unexpectedly, the resulting volatility can have a huge potential impact on currency pairs.</p> <h3>Brexit Referendum Results (June 2016)</h3> <p>The UK&#39;s EU membership referendum on 23rd June 2016 is an example of how a political event can create exaggerated market movements based on economically motivated influences.</p> &nbsp; <p>As &quot;Leave&quot; turned out to be the surprise vote, the pound crashed by 12% in a matter of hours. In the following months, GBPUSD continued to fall as traders priced in the long-term economic implications of Brexit, showing how major economic factors can trigger not just short-term volatility but also establish multi-year trends that have yet to reverse.</p> <p><img alt="Brexit Crash (ThinkMarkets)" src="/getmedia/297a310b-3bde-430a-8ba2-046aff79c484/Academy-Indicators-and-patterns-Forex-Economic-Indicators-British-Pound-Tumbles-12-Following-Vote-to-Leave-Europe-June-2016.jpg" /></p> &nbsp; <p style="text-align: center;">British Pound Tumbles 12% Following Vote to Leave Europe, June 2016</p> &nbsp; <p>The unexpected poll shows that market consensus can be wrong, and the initial reaction may signal economic trends that are larger than anticipated, as economic ramifications are already factored in.</p> <h3>US Inflation Surprise (June 2022)</h3> <p>In June 2022, markets were rattled by a stronger-than-expected US inflation report. The May CPI came in hot at 8.6%, the highest since 1981. The reading shattered the narrative that inflation had peaked, forcing market participants to quickly reassess the Fed&rsquo;s response, which resulted in an aggressive 75 basis point rate hike at its June meeting, the largest increase in nearly three decades.</p> &nbsp; <p>The greenback surged against all major currencies as traders priced in a more hawkish Fed and widening interest rate differentials. This episode highlighted how a single data point, when it invalidates the prevailing consensus, can serve as a catalyst for significant repricing across FX markets and future economic expectations.</p> &nbsp; <p>To capitalise on potential major moves while managing risks, one must develop a systematic forex strategy to trade the news.</p> <h2>Developing a Strategy for Forex Trading Economic Indicators</h2> <p>Trading forex economic news requires a systematic approach that combines preparation, the integration of technical analysis and trader discipline. Below are some simple yet effective steps to help forex traders use economic indicators to leverage opportunities:</p> <h3>Step 1: Use Economic Calendar Effectively</h3> <p>A forex economic calendar lists upcoming releases, previous readings, market forecasts and actual figures. The steps below help traders avoid being caught off guard by sudden shifts in sentiment:</p> &nbsp; <ul> <li>Mark out relevant high-impact events.</li> <li>Look ahead, as major forex news can influence the market days beforehand.</li> <li>Review previous figures to establish context.</li> <li>Track revisions, if possible.</li> </ul> &nbsp; <p>Using the ThinkMarkets calendar, you can track such events under the event chart, tracking the last five years. For example, below you can quickly visualise how many times the NFP beat economist estimates over the past year.</p> <p><img alt="How to Trade the NFP (ThinkMarkets)" src="/getmedia/902aaebb-d269-4117-a15c-ef7c8bf67ce0/Academy-Indicators-and-patterns-Forex-Economic-Indicators-NFP-Beat-Estimates-Eight-out-of-Thirteen-Times-over-the-Last-Year-June-26.jpg" /></p> &nbsp; <p style="text-align: center;">NFP Beat Estimates Eight out of Thirteen Times over the Last Year, June 26</p> <h3>Step 2: Perform Basic Fundamental Analysis</h3> <p>The market&#39;s reaction to economic data is often about how they are up against collective expectations. Traders need to:</p> <ul> <li>Dig into consensus, which acts as the benchmark.</li> <li>Be mindful of the &ldquo;surprise factor&rdquo;, which is a deviation from consensus.</li> <li>Pay attention to historical revisions (&ldquo;whisper&rdquo; numbers) as they can change the market&#39;s positioning.</li> <li>Remember that the market often prices in the outcome, especially for widely anticipated reports.</li> </ul> &nbsp; <p>Tracking the previous economic indicator example, you can adjust your expectations based on the actual figures in real time. In the image below, one can see that the last upbeat NFP ended up pushing EURUSD 12 pips lower four hours after the event. Based on 9,000 jobs added, you can make an assumption, or a guess, that every 1,000 jobs shy of estimates might move EURUSD 1.2 pips. The more events you add, the smoother your benchmark can become.</p> <p><img alt="NFP EURUSD Projection (ThinkMarkets)" src="/getmedia/00c87cba-24ec-4a34-976a-f1899b7790cf/Academy-Indicators-and-patterns-Forex-Economic-Indicators-Using-Previous-NFP-Impact-on-EURUSD-to-Project-Future-Moves.jpg" /></p> &nbsp; <p style="text-align: center;">Using Previous NFP Impact on EURUSD to Project Future Moves</p> <h3>Step 3. Combine with Technical Analysis</h3> <p>News often triggers breakouts as prices burst through established levels. Below are methods to trade the news using technical analysis.</p> <h4>Analyse Breakout Context</h4> <p>Breakouts occur when the price moves decisively beyond a previous range, and news is a powerful catalyst, as it can alter market perceptions. The most powerful breakouts usually occur when data substantially deviates from expectations.</p> <h4>Integrate Technical Levels</h4> <p>The most effective approach to trading economic releases involves mixing news catalysts with technical confirmation. This strategy blends <a href="/en/trading-academy/technical-analysis/fundamental-analysis/">fundamental analysis</a> with technical timing and risk management, and its steps involve:</p> &nbsp; <ul> <li>Map out relevant support and resistance</li> <li>Look for <a href="/en/trading-academy/technical-analysis/day-trading-chart-patterns/">chart patterns</a> (e.g. <a href="/en/trading-academy/technical-analysis/using-double-candlestick-patterns-in-day-trading/">engulfing candles</a>) that indicate momentum</li> <li>Seek confirmation from oscillators (overbought or oversold conditions)</li> <li>Spot divergences between price and indicators</li> </ul> &nbsp; <p>As historical barriers, horizontal support and resistance are the most straightforward levels. Traders should also pay attention to round numbers and psychological levels, such as 1.14, as seen in the NFP example on EURUSD.</p> &nbsp; <p>For the EURUSD NFP example, following the first 10 minutes, the 1.14 rejects bulls, with entry at 1.1410 and exit when the RSI returns from oversold territory and an <a href="/en/trading-academy/forex/using-candlestick-patterns-in-forex-day-trading/">engulfing bar</a> appears.</p> <p><img alt="NFP Trade (ThinkMarkets)" src="/getmedia/10cc7993-31ec-417c-bddc-497e270e9dce/Academy-Indicators-and-patterns-Forex-Economic-Indicators-EURUSD-NFP-Trade-Example-Support-and-Resistance-Trading.jpg" /></p> &nbsp; <p style="text-align: center;">EURUSD NFP Trade Example, Support and Resistance Trading</p> &nbsp; <p>Trendlines and moving averages act as dynamic levels. As such, it is important to identify them before data releases.</p> &nbsp; <p>Fibonacci retracement levels play a similar role and, when combined with the former, they form &quot;confluence zones&quot; where the price may react strongly.</p> &nbsp; <p>Finally, a multiple-timeframe analysis can be particularly helpful. A breakout on the lower timeframes of 5 to 60 minutes might be noise on the daily chart. However, if a news trigger causes a breakout across different timeframes (and pairs), the resulting move often proves to be sustainable.</p> <h3>Step 4. Manage Trader Risk During Volatile Release</h3> <p>News often triggers sharp price swings that can plough through stop losses or create significant slippage. Protecting your capital demands strict risk management, which includes:</p> &nbsp; <ul> <li>Reduce position sizes by 30-50% to limit losses while staying in the game.</li> <li>Use wider stop losses to take into account gaps and spikes.</li> <li>Replace actual stops with mental stops.</li> <li>Step back for at least the first 10 minutes and wait for the initial volatility to subside.</li> </ul> &nbsp; <p>With risks managed, the relationship between economic data and currency moves could help traders navigate forex markets more effectively during volatile releases.</p> <h2>Ready to Trade Forex Economic Indicators?</h2> <p>News trading is not about forex forecasting. It is more about being aware of economists&#39; estimates and being prepared to start trading and managing risk.</p> &nbsp; <p>Understanding economic indicators and integrating them with technical analysis allows forex traders to develop their own framework for economic calendar trading. However, keep in mind that the role of forex economic indicators is to help find high-probability trading setups. Indicators provide insights into the economic health of a country, while you still need to follow a disciplined forex trading approach by:</p> &nbsp; <ul> <li>Creating a personalised indicator watchlist for the economic calendar week</li> <li>Filtering economic calendar news by its level of impact</li> <li>Combining forex news catalysts with technical analysis</li> <li>Keep learning and adapting the methodology to evolving market regimes</li> </ul> &nbsp; <p>With consistent practice and disciplined risk management, trading economic releases can become one of your most reliable strategies.</p> &nbsp; <div> <style type="text/css">.didyouknow { display: block; background: #F1FDf0; width: 600px; border-radius: 20px; gap: 20px; padding-top: 48px; padding-right: 40px; padding-bottom: 48px; padding-left: 40px; font-family: Figtree; font-weight: 600; font-size: 22px; line-height: 140%; letter-spacing: 0%; } </style> </div> <div class="didyouknow">Start applying these strategies with a risk-free demo account <a href="https://portal.thinkmarkets.com/account/individual/">here!</a></div>

<p dir="ltr">Some of the most successful forex traders will tell you that a <strong>forex divergence trading strategy</strong> is one of the most accurate strategies you can use. This is because the strategy not only makes use of information that is on the charts, but also uses candlesticks that provide clear information about what buyers and sellers are doing in the market.&nbsp;</p> <p dir="ltr"><br /> This article will present a clear-cut way of identifying bullish and bearish divergence setups on the charts.&nbsp;</p> <p dir="ltr"><br /> You would be best placed to practise this forex divergence trading strategy on a demo account. A demo account provides a chance for a beginner trader to develop the ability to detect bullish and bearish patterns, as well as detect divergence setups. You can <a data-di-id="di-id-b39f6aa3-f2404134" href="https://portal.thinkmarkets.com/account/individual/demo" target="_blank"><u>open a&nbsp;FREE demo trading account</u></a>&nbsp; in less than five minutes.&nbsp;</p> <p>What Is a Divergence?</p> <p dir="ltr">Divergence simply means to deviate from, or to do something distinctive from what another entity is doing. This definition should provide a clue as to what a divergence setup is. The forex trading divergence strategy employs the use of any suitable oscillator such as the <strong>Relative Strength Index (RSI)</strong> or the <strong>Moving Average Convergence Divergence (MACD)</strong> indicator. Other oscillators such as the DeMarker indicator and the Momentum indicator are equally capable of providing guidance on divergence, so they can be utilised as well. The oscillators used for this strategy are found on the&nbsp;<a href="/en/metatrader5"><u>MT4 or MT5</u> </a>platforms.&nbsp;&nbsp;</p> <p dir="ltr"><br /> <strong>Why are oscillators used? </strong>The oscillators are used because they are leading indicators. They tend to point in the direction of the next price move, before this appears on the charts. So they lead the way. Trend indicators follow the market and are lagging indicators, which makes them unsuitable for use in divergence strategies.&nbsp;</p> <p dir="ltr">&nbsp;</p> <p><strong>So what is divergence?</strong> A situation where the price candles&rsquo; tops or bottoms point in a different direction from the corresponding tops or bottoms of the indicator&rsquo;s signal line is called a divergence. Such divergence can be bullish or bearish.</p> <h2>What is bullish divergence?</h2> <p dir="ltr">A price chart showcasing <strong>bullish divergence</strong> is characterised by the formation of progressively lower lows by the price candles when the signal line of the oscillator forms progressively higher lows. It does not matter whether it is a bullish divergence RSI signal or a bullish divergence MACD signal: the principle of spotting and trading the divergence is the same. The sole difference is that a bullish divergence RSI signal uses the price troughs formed by the single signal line to detect the divergence. The bullish divergence MACD signal uses the point of the cross between the MACD lines in the indicator window as the reference signal from the oscillator.&nbsp;</p> <p dir="ltr">&nbsp;</p> <p>Furthermore, the bullish divergence RSI signal uses a special setup on the RSI signal line known as the <strong><em>failure swing</em></strong>. The bullish divergence setups using the RSI and the MACD indicators are shown below.</p> <br /> <strong><img alt="Bullish Divergence RSI Setup" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/Bullish-Divergence-RSI-Setup.jpg" /></strong> <p>&nbsp;</p> <p>The bullish divergence RSI setup shows two troughs in the RSI indicator window forming higher lows while the price shows lower lows. The RSI, therefore, leads the price action and is pointing in the new direction. The price follows directly after to correct the divergence in the direction of the indicator&rsquo;s signal.</p> <h2>What is bearish divergence?</h2> <p dir="ltr">A price chart showing <strong>bearish divergence</strong> is characterised by the formation of progressively higher highs by the price candles in the presence of progressively lower peaks formed by the oscillator&rsquo;s signal line. This setup can occur in the form of a bearish divergence RSI signal or a bearish divergence MACD signal. The sole difference is that a bearish divergence RSI signal uses the price troughs formed by the single signal line to detect the divergence, while the bearish divergence MACD signal uses the peaks of the MACD lines in the indicator window as the reference signal from the oscillator. The example demonstrated below is that of a bearish divergence MACD signal.</p> <br /> <img alt="Bearish Divergence MACD Setup" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/Bearish-Divergence-MACD-Setup-pic-2.jpg" /><br /> &nbsp; <p dir="ltr">We can see that the bearish divergence MACD setup requires the identification of two progressively lower peaks on the MACD indicator line. The occurrence of the divergence setup should alert the trader towards seizing the initiative for necessary trade action.&nbsp;</p> <p dir="ltr"><br /> Various platforms provide different variations of the MACD indicator. The MACD indicator used above is obtained from the ThinkMarkets MT4 platform.&nbsp;</p> <p dir="ltr"><br /> The RSI can in addition, be used to spot a bearish pattern of divergence. The snapshot below illustrates how to spot a divergence using the RSI.<br /> &nbsp;</p> &nbsp;<img alt="Bearish Divergence RSI Setup" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/Bearish-Divergence-RSI-Setup-pic-3.jpg" /> <p dir="ltr">&nbsp;</p> <p dir="ltr">This setup may look like it delivered very little profit. The fact is that the trade was set up on a daily chart. On the daily chart, a single candle represents a whole day&#39;s price action. Some assets have daily trading ranges of up to 200 pips. So initiating a divergence trade on a daily chart provides a realistic chance of banking a lot of pips. Indeed, the move from the possible sell point at 101.17 to the <a data-di-id="di-id-9877e2be-956ef5d7" href="https://portal.thinkmarkets.com/account/individual/"><u>take-profit area</u></a> totaled nearly 287 pips. This shows the potentials that can be found in a divergence setup.&nbsp;<br /> <br /> The MT5 platform possesses a <em><strong>Depth of Market</strong></em> tool which allows you to spot where the big players are setting up orders. If you employ this tool and see an increase in institutional orders in a direction which follows the divergence trade, this should give you more confidence on how to trade divergence setups. You can get the MT5 and the depth of market tool <a data-di-id="di-id-76e68987-1d3b3793" href="/en/metatrader5"><u>here</u></a>.<br /> &nbsp;</p> <p dir="ltr">The instances of the divergence trades that you have been shown are overt divergence setups. However, there are divergence setups that are not overt. These are identified as the <strong>hidden divergence patterns</strong>. Just like the overt divergence setups, hidden divergence setups can be of the bullish or bearish variety.&nbsp;</p> <p dir="ltr"><br /> Typically, hidden divergences are routinely continuation patterns while the regular divergences signify price reversals. Let&#39;s look at in detail&nbsp;what <em>hidden divergences</em> are.&nbsp;</p> <h2>What is hidden bullish divergence?</h2> <p>A hidden bullish divergence is a setup where the oscillator forms progressively lower lows at the same time that the price is forming higher lows. This setup is frequently seen in situations where the price has been in consolidation or has performed a pullback from an uptrend. This setup, therefore, indicates that price still has some upside momentum and that any pullback is more likely the outcome of profit taking from previous buyers as opposed to strong selling. The emergence of a hidden bullish divergence represents a signal that the prior uptrend is likely to continue. The hidden bullish divergence is presented in this setup below.</p> <br /> <img alt="Hidden Bullish Divergence Setup" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/Hidden-bullish-divergence-setup-pic-4.jpg" /> <p><br /> Here, we can see that the RSI formed lower lows at the same time the price formed higher lows. The period of divergence occurred at the time that price was pulling back in a retracement move. Usually divergence is hidden and not immediately obvious until it has occurred. That is why traders need to incorporate other tools or indicators to enable the early spotting of the hidden divergence signal, especially if the trader wants to re-enter the market on the completion of the pullback. Such tools include the <a data-di-id="di-id-7d8cb4b1-f5d0272a" href="/en/trading-academy/forex/analysis-fibonacci-ratios"><u>Fibonacci retracement tools</u></a>, which are able to detect the exact pullback levels and match them with the higher lows formed by the price bars/candles.</p>

<p dir="ltr">The relative strength index, or RSI for short, is one of the most popular technical indicators among the trading community. It belongs to the family of oscillators, or technical tools used to determine overbought or oversold conditions. It&rsquo;s used to gauge the market sentiment.</p> &nbsp; <p dir="ltr">Developed by J. Welles Wilder, the RSI measures the speed and change of price movements. A popular way of reading RSI values is to look for divergences that occur when a new high or a new low of the price isn&rsquo;t confirmed by the RSI readings.</p> <h2 dir="ltr">How it works&nbsp;</h2> <p dir="ltr">The RSI is a&nbsp;<em>momentum indicator</em>. As such, it displays on a vertical range of 0 to 100. Readings close to 0 are viewed as &ldquo;oversold&rdquo;, while those closer to 100 are a sign of&nbsp; &ldquo;overbought&rdquo; market conditions. Unlike some other momentum indicators, readings can&rsquo;t go below 0 or higher than 100.</p> &nbsp; <p dir="ltr">According to Wilder, the relative strength index formula is as follows:</p> &nbsp; <p dir="ltr">RSI = 100 &ndash; [100 / (1 + (Average of Upward Price Change / Average of Downward Price Change)]</p> &nbsp; <p dir="ltr">When the RSI displays readings higher than 70, it means the market is trading in the overbought, or overvalued, territory. On the other hand, a dip below 30 reflects an oversold market condition.&nbsp;</p> &nbsp; <p dir="ltr">These two levels, 70 and 30, are the default values that can be modified as per the trader&rsquo;s preferences. Some traders prefer to have values set at 80 and 20 to decrease the number of trips into the overbought or oversold territory and increase the effectiveness of the RSI.</p> <h2>Strengths and weaknesses of the indicator</h2> <p dir="ltr">In general, the RSI is considered to be an effective and useful technical indicator. It generates signals that are used by a trader to paint the full picture pertaining to market conditions. As such, the RSI is the strongest when the market shifts from bullish to bearish periods.</p> &nbsp; <p dir="ltr">The RSI, though, has its limitations and weaknesses, same as any other indicator. Arguably, its biggest limitation is that an asset can trade for a long period of time in an overbought or oversold territory and still continue to make new highs and new lows.</p> &nbsp; <p dir="ltr">For this reason, you should always cross-check signals from the RSI and compare them with other technical indicators. Overbought or oversold market conditions may overlap with signals from other indicators, creating a confluence of resistance/support with enough justification to open a trade.&nbsp;</p> &nbsp; <p dir="ltr">To illustrate an overbought market, take a look at the EUR/USD daily chart:<br /> <br /> <img alt="" src="/TMXWebsite/media/TMXWebsite/Overbought-signal-RSI-pic-1.jpg" /><br /> <br /> &nbsp;</p> <p dir="ltr">The pair had been trading into an uptrend, which makes the RSI cross into the overbought territory above 70. Despite the overbought market conditions, EUR/USD creates three additional bullish candles, pushing the price action almost 400 pips higher from the moment the RSI crossed 70.</p> &nbsp; <p dir="ltr">Experienced traders tend to say that whenever the market is overbought or oversold, it can always be more overbought or more oversold. For this reason, it is not advised to open a trade that is based only on the RSI values, since they generate false signals.&nbsp;</p> <br /> In order to get more familiar with the relative strength index, its strengths and weaknesses, you may want to use the MetaTrader 5 trading platform. You can access the latest version&nbsp;<a data-di-id="di-id-50880195-98f211af" href="/metatrader5"><u>here</u></a>. On this platform, you can use the historic price action to analyse the behaviour of the RSI and the signals it generates. <h2>RSI divergence signals</h2> <p dir="ltr">The relative strength index also generates divergence signals, either bullish or bearish. The bullish RSI divergence occurs when the price action creates a new low, or a lower low, while the RSI diverges from the price action and creates a higher high. This way, the RSI leads the price action and it signals that the potential bullish reversal may take place soon.&nbsp;</p> <p dir="ltr"><br /> On the other hand, the bearish divergence occurs when the price action is still trading in an uptrend, but the RSI has already started to come off the highs. As a result, the RSI signals the impending bearish reversal in the price.<br /> <br /> How to trade the RSI In order to avoid trading the false signals from the RSI, it is advised to cross-check signals against other technical indicators. In the example below, we have GBP/USD trading in an aggressive downtrend, on a daily chart.<br /> <br /> <img alt="" src="/TMXWebsite/media/TMXWebsite/Trading-the-RSI-picture-2.jpg" /><br /> <br /> &nbsp;</p> <p dir="ltr">Similarly to the previous example involving EUR/USD, the RSI enters the oversold territory already in the first part of the downtrend. This happens as a result of a strong push lower as the bears completely overwhelm the bulls. As a result, readings are also decreasing in an accelerated fashion.&nbsp;</p> &nbsp; <p dir="ltr">Our approach, in this case, is to use&nbsp;<a data-di-id="di-id-9164943b-24d004a1" href="https://www.thinkmarkets.com/uk/learn-to-trade/advanced/fibonacci-ratios/"><u>Fibonacci extensions</u></a>&nbsp;to identify the 127.2% and 161.8% levels as potential support blocks. As you can see in the chart, a downtrend of around 1,800 pips stops at the first extension level.&nbsp;</p> &nbsp; <p dir="ltr">Once we see that the bears are losing momentum, and we have a clearly identified level as a key factor for a slowdown, we check the RSI readings to get the confirmation that the market is oversold.&nbsp;</p> &nbsp; <p dir="ltr">Given the magnitude of the move, you would expect the RSI to trade at extremely low levels. When the price action touches the 127.2% extension, the RSI trades around 15. This is not surprising given that this bearish move pushed GBP/USD towards the lowest levels since 2008.</p> &nbsp; <p dir="ltr">If you go to a monthly GBP/USD chart, you will see that the last time RSI was trending around the 15 mark was in 2008. Although the RSI can always go lower until it reaches 0, a reading of 15 is quite low, especially for the higher time frames.</p> &nbsp; <p dir="ltr">Hence, the RSI is best used as a confirmation indicator. You can also use other technical indicators, such as&nbsp;<a data-di-id="di-id-1f4e334f-6f4eda2d" href="https://www.thinkmarkets.com/uk/learn-to-trade/indicators-and-patterns/indicators/simple-moving-average-sma-indicator/"><u>moving average</u></a>, Fibonacci retracements, trend lines etc., to identify important levels and then cross-check them with the RSI readings.&nbsp;</p> &nbsp; <p dir="ltr">In this particular case, we are trading against the 127.2% extension. A&nbsp;<u>stop-loss</u>&nbsp;should be placed below the extension, while a profit-taking order depends on your risk sentiment and risk/reward ratio.&nbsp;</p> &nbsp; <p dir="ltr">Practise trading of the RSI, and other technical indicators, by&nbsp;<a data-di-id="di-id-fd99886e-20c0aa3e" href="https://portal.thinkmarkets.com/account/individual/demo"><u>opening a demo trading account</u></a>. This way, you can identify trading opportunities yourself, by applying RSI and other technical indicators to better understand their co-existence, as well as to protect your capital until you feel comfortable to trade live markets.</p> <h2>Summary</h2> <p dir="ltr">The relative strength index is a momentum indicator that identifies when the market is trading in the overbought or oversold conditions. The indicator gauges market sentiment by measuring the speed and change of price movements. As such, it is best used in trending markets, and when mixed with other technical indicators.</p> &nbsp; <p dir="ltr">The RSI also displays bullish and bearish divergences, which happen when a new high or low isn&rsquo;t confirmed by the RSI readings. Hence, divergences can lead the price action into a reversal, and generate a signal to the trader that the price may change its direction soon.</p>

<p>One of the most basic and perhaps oldest indicators used by technical analysts is the&nbsp;<strong>stochastic oscillator.</strong>&nbsp;The stochastic oscillator is an indicator that measures momentum and the strength of a trend. Essentially, its job is to analyse price movement and show how strong the price move is.&nbsp;</p> <p>&nbsp;</p> <p>The indicator measures the momentum of price, and also shows a slowing of momentum as the momentum of a financial instrument needs to slow down before changing direction. This addresses a weakness in retail trading, the fact that far too few traders pay attention to the importance of the rate of change.&nbsp;</p> <p>&nbsp;</p> <p>The stochastic oscillator is one of the more common indicators, and it&rsquo;s one that you will see in a lot of analysis. However, like any other indicator it is simply a tool that you will be using to navigate through the forex markets, and like any other tool it is needed to be used in the proper settings and situations.&nbsp;</p> <h2>How to add the stochastic oscillator to MetaTrader charts</h2> <p>Adding the stochastic oscillator to the MetaTrader platform is very easy. By clicking on the&nbsp;<strong><em>Insert</em></strong>&nbsp;menu, you can pull down the list and click on&nbsp;<em><strong>Indicators</strong></em>, followed by&nbsp;<em><strong>Oscillators,</strong></em>&nbsp;and then&nbsp;<strong><em>Stochastic Oscillator</em></strong>. It&#39;s a common indicator, and as such it&#39;s built into the platform and there is no need to download from anywhere else.<br /> <br /> <img alt="" src="/TMXWebsite/media/TMXWebsite/Oscillator-picture-1.jpg" /><br /> <br /> The settings dialog box will pop up, and there are multiple parameters that you can change. The&nbsp;<strong>%K</strong>&nbsp;period and the&nbsp;<strong>%D</strong>&nbsp;period settings are available. The&nbsp;<strong>%K</strong>&nbsp;should be thought of as the slow value of the stochastic indicator and the&nbsp;<strong>%D</strong>&nbsp;should be thought of as the fast value of the stochastic indicator. It uses&nbsp;<em>a couple of moving averages</em>&nbsp;to measure the&nbsp;overall momentum.</p> <h2>Why does momentum matter?</h2> <p>Think back to your mathematics studies. One of the biggest influences in calculus is the absolute rate of change. The idea is that if the market is in an uptrend, but if the momentum starts to slow down, it can suggest that the market is running out of steam and, therefore, could be ripe for a reversal. In this sense, it can suggest whether or not the market is going to continue, or if it might be over-extended in one direction or the other, and other words&nbsp;<em>overbought</em>&nbsp;or&nbsp;<em>oversold</em>.</p> <h2>Using the indicator to make decisions</h2> <p>The stochastic oscillator has a multitude of uses when it comes to trading forex. We have already mentioned the most obvious use for the stochastic oscillator: the idea of identifying overbought or oversold conditions. In this scenario, the stochastic oscillator is best used in a range bound market, as it can tell you when to buy and sell in a relatively well defined situation.<br /> <br /> When you look at the stochastic oscillator window at the bottom of the chart, you see the two moving averages going back and forth in an up and down pattern. You will notice that there are two lines in the indicator window including the 80 and the 20 level.</p> <p>&nbsp;</p> <p>The&nbsp;<strong>area above the 80 level</strong>&nbsp;is considered to be&nbsp;<em>overbought</em>, while the&nbsp;<strong>area below the 20 level</strong>&nbsp;is considered to be&nbsp;<em>oversold</em>. Furthermore, you need to see the moving averages inside the stochastic oscillator to cross in the overbought or oversold areas in order to get a reversal signal. Anything between the two levels is essentially ignored in this scenario.</p> <p><img alt="" src="/TMXWebsite/media/TMXWebsite/Oscillator-picture-2.jpg" /><br /> <br /> &nbsp;</p> <p>Looking at the chart, you can see that the stochastic oscillator had several moves back and forth between the 80 and the 20 levels. However, there are only a couple of areas where the indicator either broke into the overbought area or the oversold area and had a cross. You need both of these things to happen in order for it to fire off a signal.</p> <p>&nbsp;</p> <p>In the graphic below, you can see that the signals fired off are color-coded by the arrows, with the red showing an overbought condition and a potential selling opportunity, and the blue showing potential buying opportunities in an oversold condition.</p> <p>&nbsp;</p> <p>It should be noted that using the stochastic oscillator in this way is much more reliable when in a sideways market, preferably between significant support and resistance. This makes the stochastic oscillator truly important, because statistically speaking markets are in some type of consolidation or sideways action more than 70% of the time. In other words, it&rsquo;s much more common to be in this environment than it is to be out of it.&nbsp;</p> <h2>Measuring divergence</h2> <p>Another way that people use the stochastic oscillator in forex trading is to measure for divergence. The idea is that as with any oscillator, you could see momentum going in a different direction than the overall price. As an example, the momentum could be rising while price is falling or vice versa. If you are in a scenario where price is rising but the momentum is slowing, that means that there is less aggression to the upside and therefore less demand, even as prices press higher. This can be a sign that potential trouble is on its way.&nbsp;</p> <p>&nbsp;</p> <p>Take a look at the chart just below. You can see that there is a clear uptrend line on the four hour chart for the GBP/AUD pair. As the price was rising, though, notice that the stochastic oscillator made a&nbsp;<em>lower high</em>, which is the opposite of an uptrend. This suggests that the rate of change is slowing down, therefore one would have to be a bit suspicious about the efficacy of the move.&nbsp;</p> <p>&nbsp;</p> <p>After all, if there is less momentum, it suggests that there are fewer fresh orders coming in to push the market to the upside. Ultimately, you can see that shortly after the diversions with the&nbsp;<em>lower high</em>&nbsp;in the stochastic oscillator, the market broke down below the trend line and then eventually fell from those levels. Divergence can be found in several indicators, essentially the oscillator family. Because of this, using your divergence spotting skills can work in multiple other oscillators as well, as they all essentially work the same in this scenario.<br /> <br /> <img alt="" src="/TMXWebsite/media/TMXWebsite/Oscillator-pic-3.jpg" /></p>

<p>The Fibonacci ratios commonly used are 100%, 61.8%, 50%, 38.2%, 23.6% - these are shown as horizontal lines on a chart and may identify areas of support and resistance. These levels are created by drawing a trend line between two extreme points and diving the vertical distance by the key Fibonacci ratios. These extreme levels are known as the recent swing high and swing low,&nbsp;<br /> <br /> To identify the Fibonacci levels for an uptrend, click on the swing low and draw the trend line to the swing high. In a down trend you simply reverse the trend line. The following chart shows the Fibonacci levels on price which is in an uptrend.<br /> <br /> <img alt="Fibonacci Retracement" src="/TMXWebsite/media/TMXWebsite/Fibonacci-Retracement.png" /><br /> <br /> As you can see on the chart, we have plotted the Fibonacci levels by clicking on the swing lows at 1.000 and swing highs at 1.14. The Fibonacci levels plotted show where price travels to and reverses, and are evident at the 61.8%, 38.2% and 23.6% levels. The 61.8% level is a common support level, as in the above example you can see the price has tested this level on many occasions. More recently, you can see where the price broke through the 38.2% level and retested this level. In this example there&rsquo;s an expectation for the currency pair to test the 23.6% level at 1.11.<br /> <br /> The next chart shows the Fibonacci ratios plotted for the pricing action in a down trend.&nbsp; As you can see, we&rsquo;ve drawn a trend line from the swing high at 1.1037 to the swing low at 1.0994. Again, you can clearly see where the price reversed at key Fibonacci levels such as the 50% and 23.6% levels.<br /> <br /> <img alt="Fibonacci Retracement" src="/TMXWebsite/media/TMXWebsite/Fibonacci-Retracement-2.png" /><br /> <br /> Fibonacci levels are by no means fool proof &ndash; they&rsquo;re not areas where you would buy and sell from. You should look at them as areas of interest &ndash; an indication of where the price may go to in the future.<br /> &nbsp;</p> <h3><strong>Combining Fibonacci ratios with support and resistance</strong></h3> <p>Fibonacci ratios can be subjective, but can also be used to identify key support and resistance levels. A potential way to use the Fibonacci levels is to spot potential support and resistance levels, and see if these levels line up with the Fibonacci levels. If you do spot these levels, the chances of the price bouncing off them are higher.<br /> <br /> <img alt="Fibonacci Retracement" src="/TMXWebsite/media/TMXWebsite/Fibonacci-Retracement-and-Support.png" /><br /> <br /> As you can see from the chart, the key Fibonacci levels 61.8% and 38.2% have been areas of support and resistance previously, and by identifying this on the chart, these levels can potentially be areas where you could enter the market. With traders looking at the same support and resistance levels, there&rsquo;s a good chance that there will be a number of orders around those levels.&nbsp;</p>

<h2>Forex market hours and liquidity</h2> <p>With indices, shares&nbsp;and most other financial products that are traded on various global exchanges, you can only make trades during the exchange&rsquo;s business hours. Fortunately for forex traders, currencies are free of this restriction and can be traded day or night, with the forex market hours being open 24 hours a day, 5 days a week.</p> <h2>Capturing trading opportunities around the clock</h2> <p>Because the Forex market does not have a physical location or a central exchange, it is considered an Over-the-Counter (OTC), or &quot;Interbank&quot;, market due to the fact that the entire market is run electronically, within a network of banks. This means that you can place trades through your broker 24 hours a day and trade at a time that&rsquo;s convenient for you.</p> <p>Below you can see a 24 hour period which shows the active trading sessions of the Interbank and Retail FX markets, using London as the time zone as this is the central hub to Forex trading.</p> <h2>Nylon session</h2> <p>The highest volume of trading activity happens during the London session (as it also has Europe as well) but liquidity is at its highest when New York opens and overlaps with the London session. This is referred to as the &lsquo;Nylon&rsquo; session (New York and London) when liquidity and trading volume is at its highest. Therefore we can expect larger moves and is an ideal time to trade breakout strategies. This is a popular time for intraday traders to participate as due to the higher volume and liquidity, spreads are at their tightest so transaction costs for the traders is lower.<br /> <br /> <img alt="timezones" src="/TMXWebsite/media/TMXWebsite/timezones_1.png" /><br /> <br /> &nbsp;</p> <h2>Asia Session</h2> <p>Whilst New York and London are considered important trading centres the same can also be said for Tokyo, Hong Kong and Singapore. As London and New York banks close their official trading sessions, the Asian banks open and trade which is why Forex is seen as a 24 hour market. However the volume is not as high as the Nylon session which means we tend to see smaller price movements and wider spreads.<br /> &nbsp;</p> <h2>24-liquidity cycle</h2> <p>The visually show you the changes in liquidity around a 24 hour period the chart below has a 14 period ATR indicator (Average True Range). This is a proxy for volume and each horizontal line represents 24hrs. We can see that during the Asian session volume and liquidity is at its lowest and increases when Europe and London opens, with the peak during the Nylon session. Whilst it is not precise to the hour or minute I hope this demonstrates the daily cycle of increasing and decreasing volume.<br /> <br /> <br /> <img alt="timezones" src="/TMXWebsite/media/TMXWebsite/timezones_2.png" /><br /> &nbsp;</p>

Bullish and bearish Engulfing candlestick patterns, also called Outside bars, are powerful dual-candle formations. Found at the end of a downtrend or uptrend, these patterns often indicate a potential reversal. Engulfing patterns are also easy to spot, which adds to their popularity and makes trading with them very straightforward.<br /> <br /> The difference between this pattern&#39;s bullish and bearing versions depends on the candle order within it. <h2>Bullish Engulfing candlestick pattern</h2> A bullish Engulfing pattern occurs at the end of a downtrend and consists of two candles. The first candle is bearish (red) and has a relatively small body and short shadows, also known as wicks. The second candle, on the other hand, is bullish (green) and has longer wicks and a longer body that engulfs the body of the previous bearish candle.<br /> <br /> <img alt="Bullish Engulfing candlestick pattern (Outside Bar)" src="/getmedia/4908dd05-65dd-4e63-8e2c-91688f3ef6cd/Bullish-Engulfing-candlestick-pattern-(Outside-Bar).png" /><br /> <br /> The body of the first candle doesn&#39;t necessarily need to be exactly in the middle as long as it&#39;s completely overwhelmed by the body of the second candle. For a candlestick pattern to qualify as bullish Engulfing, the high price of the second candle should be higher than the high price of the first candle. The same scenario applies to the low prices &ndash; the second candle must have a lower low price than the first one.<br /> <br /> If the closing price (top of the body) of the second candle is higher than the high price (top of the wick) of the first candle, the Engulfing pattern is considered a much stronger bullish reversal signal. The reason is that the second candle indicates that bulls gained control over the price. <h2>Bearish Engulfing candlestick pattern</h2> A bearish Engulfing pattern works exactly the same way. The only difference is that it is a bearish reversal pattern that occurs at the top of an uptrend, with a bullish (green) candle on the left and a bearish (red) one on the right.<br /> <br /> <img alt="Bearish Engulfing candlestick pattern" src="/getmedia/b35bbf54-f9e5-4090-a3ae-155c631dcdb8/Bearish-Engulfing-candlestick-pattern.png" /> <h2>How do Engulfing patterns work?</h2> As we mentioned above, both patterns take place at the end of a strong trend. The first candle in both formations (either bullish or bearish) signals the continuation of a trend. On the other hand, the second candle (bearish or bullish, respectively) is powerful enough to completely shut down the first one and initiate a new trend.<br /> <br /> Engulfing candles in trading are very significant when conducting analysis, as traders usually aim to capitalise on new trends when markets change direction. Reversal patterns, such as bullish and bearish Engulfing patterns, signal an impending change in the price direction, as the so far dominant force has started losing momentum, which allows the other force to step in.<br /> However, as with other candlestick patterns, Engulfing formations have their own limitations. While they are quite powerful at the end of a strong trend, they are almost non-tradeable when they appear in a sideways market. <h2>Engulfing vs Harami candlestick patterns</h2> An Engulfing pattern has an opposite version &ndash; a Harami candlestick formation, also called an Inside Bar. Its structure is identical, but the candles within it swap places. The first candle is long, entirely overwhelming the second smaller candle. A Harami candle can also exist in two variations &ndash; bullish and bearish.<br /> <br /> <img alt="Bullish and bearish Harami candlestick pattern (Inside bars)" src="/getmedia/418d3953-c8d9-46f8-b205-af678bcf1aeb/Bullish-and-bearish-Harami-candlestick-pattern-(Inside-bars).png" /><br /> <br /> However, in general, this pattern doesn&#39;t provide a strong signal. Once it occurs, it may indicate an upcoming reversal, but the price often starts trading sideways instead or continues following the trend. That&#39;s why this pattern is not particularly popular among traders. <h2>How to trade with Engulfing patterns</h2> A trading strategy with Engulfing patterns is pretty straightforward as they provide a powerful signal on their own. <h2>Trading with a bearish Engulfing pattern</h2> On the image below, you can see a series of highs and lows that created an uptrend. Following a new short-term high price (the first candle in the bearish Engulfing pattern), the price suddenly drops lower to create a strong, powerful bearish candle.<br /> <img alt="Trading with a bearish Engulfing pattern" src="/getmedia/e13e4fd6-918a-47a1-8d3f-669a1d94f57e/Trading-with-a-bearish-Engulfing-pattern.png" /><br /> All elements are in place, and the bearish Engulfing pattern occurs. After that, the price still has both lows and highs but ultimately trades at lower levels.<br /> <br /> In this particular example, you can see the power of a bearish Engulfing pattern. The trend reversed after the second candle generated a signal that the bears had taken control of the price, and the downtrend may be finished.<br /> In such cases, traders tend to go short, using the second candle as an entry point and its high price as a stop loss. The take-profit level is derived using other technical indicators.<br /> <br /> For a more complete trading strategy, you may also use additional technical analysis tools, such as support and resistance or technical indicators.<br /> For example, if we zoom out of the previous price chart, we can see a potential placement of two support levels that may (and did, in this case) affect a newly formed trend.<br /> <br /> <img alt="A bearish Engulfing candlestick pattern with support lines in a price chart" src="/getmedia/097e5469-ff87-4b8d-92c0-5528ed694c04/A-bearish-Engulfing-candlestick-pattern-with-support-lines-in-a-price-chart.png" /><br /> <br /> On the other hand, if you have a long position open in an uptrend, a bullish Engulfing candle pattern may serve as a signal to exit the market before it reverses. <h2>Trading with a bullish Engulfing pattern</h2> A strategy with a bullish Engulfing formation would work exactly the same, but you would go long following the same logic. With a short position in a downtrend, this pattern would also serve as an exit signal.<br /> <br /> For example, the image below shows a bullish Engulfing pattern in action &ndash; the downward reversed right after the formation occurred.<br /> <br /> <img alt="Trading with a bullish Engulfing pattern" src="/getmedia/13a3792d-d4e9-4eed-9fe4-0bbbd24b7401/Trading-with-a-bullish-Engulfing-pattern.png" /><br /> <br /> Keep in mind that even the most accurate trading signals never guarantee that the market will move in the predicted direction. That&#39;s why experienced traders always have risk management tools, such as stop loss and take profit in place.<br /> &nbsp; <p>Create a demo account to solidify your knowledge in a risk-free market environment. Alternatively, move to our next article, where we explain how <a href="/za/trading-academy/indicators-and-patterns/marubozu-candlestick-pattern/">Marubozu candles</a> work.</p>

<p> Tweezer Top and Bottom, also known as Tweezers, are reversal candlestick patterns that indicate a potential change in the price direction. Both formations consist of two candles that occur at the end of a trend, signaling its weakening. </p> <h2>Tweezer Bottom candlestick pattern structure</h2> <p> A Tweezer Bottom is a bullish reversal pattern that appears at the bottom of a downtrend. Both candles are of the same length but the first candle in this formation is bearish, in line with the bearish trend, while the second is bullish. </p> &nbsp; <p> The key message that this pattern signals is that despite a poor performance on the first day, the bears were not able to control the price direction as buyers were able to claw back all of their losses on the second day, which marks a deep blow for short sellers. </p> &nbsp; <p> For the pattern to qualify as a Tweezer bottom, the opening price of the new candle needs to be near the close of the prior day. The price should also not trade below the prior day&rsquo;s closing price. </p> <br /> <img alt="Tweezer Bottom candlestick pattern" src="/TMXWebsite/media/TMXWebsite/Tweezer-Bottom-candlestick-pattern.png" /> <h2>Tweezer Top candlestick pattern structure</h2> <p> A Tweezer Top candlestick pattern has exactly the same structure as a Tweezer Bottom but reversed. This formation occurs at the end of an uptrend, indicating potential change. Therefore, it is a bearish reversal pattern. The first candle of a Tweezer Top is bullish and continues in the same direction as the trend, while the second candle is bearish and suggests that the trend may be changing soon. </p> <br /> <img alt="Tweezer Top candlestick pattern" src="/TMXWebsite/media/TMXWebsite/Tweezer-Top-candlestick-pattern.png" /> <p> Similar to Tweezer Bottom, both candles should roughly match each other. However, the high prices of both candles must be approximately on the same level. </p> &nbsp; <p> Keep in mind that both Tweezer patterns are only considered valid when they occur in uptrends and downtrends. In a sideways trading market, they don&rsquo;t provide any value and signal the indecision to move in either direction. </p> <h2>How do Tweezer Bottom and Tweezer Top patterns work?</h2> <p> As reversal patterns, Tweezers are quite popular among traders searching for clues on when the price will change its direction. This pattern can be a powerful signal of a potential upcoming reverse, as it suggests that the dominating power loses its control over the price. In turn, the opposing power gains momentum to close the session in their favour. </p> &nbsp; <p> It is important to note that the stronger (longer) the second candle is, the stronger signal this pattern generates, indicating that the opposing power had enough strength to push the closing price far from the opening. In some cases, a tweezer pattern takes the form of the <a href="/trading-academy/forex/analysis/bullish-bearish-engulfing-patterns">Engulfing</a> formation, where the second candle shuts down the first one entirely, indicating a particularly strong reversal signal. </p> &nbsp; <p> Nevertheless, just like any other candlestick pattern, neither Tweezer Bottom nor Tweezer Top guarantees market reversal and serves only as a suggestion. To help confirm their findings, traders often use additional tools. </p> <h2>How to trade with a Tweezer Bottom candlestick pattern</h2> <p> As noted earlier, the bullish Tweezer occurs at the bottom of a downtrend. On the image below, you can see that the instrument&rsquo;s price has been moving lower for some time, creating lower highs and lower lows. </p> <br /> <img alt="A trading example with Tweezer Bottom candlestick pattern in a chart" src="/TMXWebsite/media/TMXWebsite/A-trading-example-with-Tweezer-Bottom-candlestick-pattern-in-a-chart.png" /> <p> If you look at the bullish Tweezer at the bottom, the first candle is a strong bearish candle that indicates the continuation of the downside move. However, the second candle surges in the opposite direction. </p> &nbsp; <p> In the following trading sessions, the bulls were able to keep pushing the price higher, completely reversing the trend, despite occasional pushbacks from bears. </p> &nbsp; <p> In this particular case, we see a very strong bullish candle that further adds to the overall bullishness of the tweezer bottom candlestick pattern. </p> &nbsp; <p> Trading the bullish Tweezer is not much different from trading other bullish reversal candlestick patterns &ndash; it is advisable to wait for the formation to be completed before entering a trade. Risk-averse traders may wait for an additional candle to close to confirm the new trade. </p> &nbsp; <p> Once you are confident that the pattern strongly indicates an upcoming reversal, you can open a long trade. The stop loss may be placed below the low point of the pattern because if the price trades below this level, it will invalidate the pattern. </p> <h2>How to trade with a Tweezer Top candlestick pattern</h2> <p> As you already know, unlike the bullish Tweezer Bottom, the Tweezer Top candlestick formation occurs at the top of an uptrend. Therefore, it is a bearish pattern. </p> &nbsp; <p> On the image below, you can see a strong bullish trend. A bearish Tweezer Top was formed on its top, suggesting a trend reversal. </p> <br /> <img alt="A trading example with Tweezer Top candlestick pattern in a chart" src="/TMXWebsite/media/TMXWebsite/A-trading-example-with-Tweezer-Top-candlestick-pattern-in-a-chart.png" /> <p> Although the second candle is slightly weaker than the first one, the uptrend still sees a strong reversal. Like with a Tweezer Bottom, traders usually open their position in the opposite direction from the main trend. In this case, it means going short, using the latest high as a stop loss. </p> &nbsp; <p> If the second candle is not strong enough to provide confidence in the upcoming reversal, you may use additional tools, such as trendlines. In the example illustration below, you can see how a crossed support line confirms the reversing trend. </p> <br /> <img alt="Support trendline with a Tweezer Top candlestick pattern in a chart" src="/TMXWebsite/media/TMXWebsite/Support-trendline-with-a-Tweezer-Top-candlestick-pattern-in-a-chart.png" /> <p> A great way to learn the Tweezer candlestick patterns trading is to practise identifying them in a risk-free demo account environment. Sign up today and practise opening positions with this candlestick pattern. </p> &nbsp; <p> If you want to learn more about other patterns, head to our next article, where we explain how the <a href="/en/trading-academy/indicators-and-patterns/morning-evening-star-candlestick-patterns/">Morning Star and Evening Star candles</a> work. </p>

<p>Pennants are another type of multi-candle chart pattern. Like <a href="/za/trading-academy/indicators-and-patterns/bear-bull-flag-pattern/">Flag formations</a>, bullish and bearish Pennants are continuation patterns indicating that the prevailing trend will likely continue after a brief pause. </p> <h2>Bullish Pennant chart Pattern structure</h2> A bullish Pennant pattern has a very similar structure to a bullish Flag &ndash; a pole, a body (pennant) and a breakout. The main difference is that while the Flag&rsquo;s body is made of candles trading strictly within two parallel trendlines, the Pennant&rsquo;s body looks more like a triangle.<br /> <br /> <img alt="A bullish Pennant chart pattern" src="/TMXWebsite/media/TMXWebsite/A-bullish-Pennant-chart-pattern.png" /><br /> <br /> In general, to be considered valid, bullish Pennant patterns need to have the following characteristics: <ul> <li>A bullish flagpole with higher highs and higher lows</li> <li>A consolidation phase that takes place between the two converging trendlines</li> <li>A breakout through the upper line.</li> </ul> <h2><br /> Bearish Pennant chart Pattern structure</h2> A bearish Pennant is a continuation pattern that resembles a bearish Flag as well, following the same logic &ndash; its body has the shape of a pennant instead of a flag.<br /> <br /> <img alt="A bearish Pennant chart pattern" src="/TMXWebsite/media/TMXWebsite/A-bearish-Pennant-chart-pattern.png" /><br /> <br /> The main characteristics of this pattern are: <ul> <li>A strongly bearish flagpole with lower highs and lower lows</li> <li>A relatively short body between the two converging lines</li> <li>A breakout through the bottom line.</li> </ul> <h2>How do Pennant chart patterns work?</h2> Both bullish and bearish Pennants can show us that the dominant power on the market had enough strength to push the price in their favour and create a trend. At some point, it weakens, allowing the opposing power to test its resistance, which sends the price sideways, bouncing back and forth between the two trendlines.<br /> <br /> Eventually, the previously dominant power consolidates its efforts to resist the attempts of price reversal and pushes for the trend&rsquo;s continuation.<br /> <br /> If the breakout in any of the two Pennants happens in the opposite direction invalidating the pattern, it means that the dominant power lost its ground, and the trend may reverse. <h2>How to trade with Pennant chart patterns</h2> The first step in a trading strategy with Pennants is to wait for the pattern to be completed. This means that you need to be able to identify a clear breakout &ndash; the last element of the pattern. Once you have all the elements in place &ndash; you can open a position. <h3>Trading with a bullish Pennant pattern</h3> As a bullish Pennant suggests a continuation of an upward price movement, traders usually go long once they spot this formation.<br /> <br /> On the image below, you can see a clear example of a bullish Pennant chart pattern.<br /> <br /> <img alt="Trading example with a bullish Pennant pattern" src="/TMXWebsite/media/TMXWebsite/Trading-example-with-a-bullish-Pennant-pattern.png" /><br /> <br /> In this case, a rule of thumb for opening a position is to set the closing price of the breakout candle as an entry level and its opening price as a stop loss. However, if the opening price is just at the boundary of the breakout point, a stop should be placed slightly below this point. The general idea is that the price should not trade deeply into the pattern - if this happens, the pattern will fail, and the trader will generate a loss.<br /> <br /> For a target take-profit level, you can visually copy-paste the Pennant&rsquo;s flagpole and place it at the breakout point. The end of it is where the uptrend will likely pause, stop or reverse.<br /> <br /> Risk-averse traders usually wait for one more bullish candle to close after the breakout to confirm the trend. This can mean a missed trading opportunity on the one hand, but on the other hand, it can prevent risk should the price move downward instead. The drawback with this approach is that the risk-to-reward ratio will be inferior. <h2>Trading with a bearish Pennant pattern</h2> A bearish Pennant works exactly the same way but in reverse. As a continuation chart pattern, it suggests a resumption of a downward price movement. Once the pattern is confirmed, traders tend to go short.<br /> <br /> The image below illustrates a bearish Pennant formed in a chart with a clear breakout through the bottom trendline.<br /> <br /> <img alt="Trading example with a bearish Pennant pattern" src="/TMXWebsite/media/TMXWebsite/Trading-example-with-a-bearish-Pennant-pattern.png" /><br /> <br /> Following a trading example with a bullish Pennant, risk-prone traders can use the closing price of the breakout candle as an entry and its opening price as a stop loss. The target price, or take profit level, can be set by copy-pasting the Pennant&rsquo;s flagpole to the breakout point.<br /> <br /> If you study price charts, you will notice that quite often, the price breaks in the opposite direction &ndash; through the bottom trendline in a bullish Pennant or breakout through the upper trend line in a bullish version of it. When it happens, the patterns are considered invalid, as there is no clear indication of the price direction.<br /> <br /> That&rsquo;s why it&rsquo;s important to keep in mind that Pennant patterns, like any other chart pattern, don&rsquo;t provide a guaranteed trading signal but only a suggestion. Experienced traders use additional tools, such as one- and two-candle patterns or technical indicators, to gain additional insights into the market conditions. It is also important to note that patterns in smaller timeframes, like the 5 or even 30 minute timeframes tend to have a lower success rate compared to a pattern formed on the 4-hour or daily chart.<br /> <br /> It can also be helpful to try trading with Pennants in a risk-free demo environment first and move to trading with real money when you gain confidence in your skills. Create a demo account now and start practising. If you want to know more about chart patterns, check out our next article, where we&rsquo;ll talk about a unique pattern called a Cup and handle.