Futures trading, especially short term trading based on technical signals, can feel overwhelming if you have no indication. Trading indicators are supposed to change that. When used correctly, indicators provide potentially insightful information that can help you find a winning prospect in the market.
There are 4 main types of trading indicators:
- Trend: Tells you the strength and direction of price movement
- Momentum: Shows you the rate of change of price movement
- Volatility: A directionless measure of the rate of price movement
- Volume: Measures the strength of a trend and confirms its direction
The indicators are also divided into 2 categories:
- First: Gives signals when a market movement is about to start
- Late: Gives signals after the start of a market movement and confirms it
We’ll talk about some of the best futures trading indicators and how you can use them to have better chances of success.
Best Futures Trading Indicators
Many traders use multiple indicators at the same time, all of which follow a different aspect of the market. In general, you want to choose trading indicators that complement each other. Let’s take a look at some of the most commonly used metrics and what they do.
Moving averages (MA) are intended to smooth price data and make it easier to spot trends. Moving averages change over time since each time new data is added, the first data is removed so that the number of data points in the average remains constant.
You can set your moving average to cover price data from different time periods. This is the origin of the terms you may have seen – 10 day moving average, 30 day MA and the time period you choose is very important to consider. In general, the shorter your period, the more useful your moving average will be for short-term trading. Longer periods are generally intended for longer-term traders, as the average takes into account past prices.
One of the most common uses of the moving average is the crossover strategy. Traders will go up a short period moving average like the 10 day MA with the 50 day MA on a chart. As the lines cross, you can deduce some things about the market. For example, if the 5-day MA crosses the 200-day MA, many traders interpret this as a bullish signal.
There are many different types of moving averages, all set to tell you different things. Here are some of the best known.
- Simple moving average (SMA): It is an arithmetic moving average calculated over a predetermined period that is used on its own and in the calculation of many other moving averages.
- Exponential Moving Average (EMA): An average of the price points over a predetermined period which gives more weight to more recent prices. The result is a more responsive short-term movement that can help a short-term trader identify a trend faster than the SMA.
- Triangular Moving Average (TMA): TMA is very similar to SMA, but it is smoothed using the average of all SMA values. The result is an indicator that does not react as quickly to new information. This is useful for swing traders and fundamental traders who care about long term trends versus short term price movements.
If you are trading in more volatile waters, Fibonacci retracements can be useful in identifying and monitoring price declines. In many cases, short-term price movements can retreat into long-term trends, giving the savvy trader the opportunity to make money in the market.
When you go up your Fibonacci retracement indicator, you will normally want to measure the distance between a very high and a very low in a trend. When you put the tool in place, you should notice lines marking the 23.6%, 38.2%, 50%, 61.8%, and 100% Fibonacci ratios. In practice, a breakout of a particular Fibonacci retracement level is generally used to signal that the market will likely continue to the next retracement level if the breakout holds. Many traders believe that they must also appear as important markers in the stock market.
Many traders start their assessment with Fibonacci, combining an analysis of the retracement levels of a trend with other analysis around the support and resistance levels. For example, if a trend falls to the 61.8% line which also coincides with trend support, it may indicate real support for that price point.
Parabolic stop and reverse (PSAR)
The PSAR is a kind of unique indicator that creates a parabolic curve of points on your chart. These points will appear above or below the price of your asset depending on its movement. The placement of points ideally changes when the trend changes.
For example, if the PSAR is above your price and tilts below, this indicates a bullish movement in the price action. It may correspond to a buying opportunity, but not always. The reverse is also true. If the points start below and move above, it means a bearish move and a possible sell opportunity. PSAR is used to help traders easily understand volatile market situations. This indicator is a bit behind, so it may be less useful for capturing the very beginning of a trend.
Best brokers for futures
If you plan to trade futures profitably, you need a reputable and competitive futures broker. Your choice of broker will affect the fees you pay for transactions, the assets you have access to, and many other important things. Your broker can also be the link to your trading software, but not always.
Take the time to browse and test the features of well-known and well-regulated brokers before committing to one.
Examples of leading indicators
If you are a short term trader in the futures market, leading indicators will likely be very important to you. Because you don’t stay in trades for long, you need to know information that allows you to anticipate trends. Here are some of the best leading indicators to study. While not foolproof, they can provide you with an alert to focus your attention more narrowly on a particular setup.
- Relative Strength Index (RSI): Mainly used to identify overbought and oversold markets
- On the scale volume (OBV): Focuses on changes in transaction volume
- Stochastic oscillator: Momentum indicator that can indicate when the market is oversold or overbought and its directional momentum is slowing down
Analyze futures markets
If you ask 5 traders about their favorite indicators, you will get 6 different answers. All 5 will tell you, however, that no metric is a quick fix. Good technical analysis usually involves drawing relevant information from several relevant indicators. Some traders also engage in lagging indicators to validate leading indicators.
If you are just beginning your trading journey, it is important that you first familiarize yourself with the limits of your favorite indicators. Once you’ve found some metrics that you like, the second step is to figure out what they can’t do. From there, you can start combining indicators to consolidate weaknesses in a more sophisticated trading strategy.
The best indicator of your future is you
No matter what types of futures contracts you trade or what indicators you use, your trading strategy more than determines your success. It’s easy to rely too much on trading indicators, which can get you stuck in analysis paralysis or spur you on to false moves.
Before filling out your indicator screen, make sure you have identified your overall assumption for the market. Keep track of the trading strategies that work for you. Once you have a basic trading philosophy, it should be much easier for you to choose the indicators that will inform your trades.
Bookmark the Benzinga website for up-to-date information on the latest indicators and everything you need to trade with confidence in the futures market.
AMP Global is a CySEC regulated FX, CFD and Futures brokerage firm and brings US trading experience to Europe.
Through AMP Global World, you can access global futures exchanges while trading currencies and CFDs with your all-in-one Metatrader 5 account. This trading solution gives AMP Global an edge over competing companies.
You can get a demo trading account of Futures, Forex, Metals and Energy Exchange traded for free to learn how to trade, risk free. If you are an experienced trader, you may want to test expert advice, manual strategies, or back-test historical chart data.
Once you are ready to start trading, you can get a trading account, an Islamic account, or a corporate account for businesses.
Get started today with AMP Global.