While day trading the EURUSD, prices are constantly moving. New traders tend to get lost, not knowing when to trade, or in which direction. While not required, adding an indicator to the chart may provide more clarity.
Nearly every strategy I use for day trading involves a pullback. A pullback is a partial retracement of the prior price wave. When the price moves predominantly sideways following a strong move up or down, that is also considered a pullback.
I watch the price waves unfold and determine in which direction the price is likely to move after a pullback. I then look for an entry opportunity during that pullback. This method, and variations of it, are discussed in How to Day Trade Forex (EURUSD) in Two Hours or Less. The method discussed in that article is a trend following strategy that requires waiting for a pullback, consolidation, and then a break out of the consolidation in the trending direction. The “trending” direction isn’t always obvious. For example, following a price reversal, many traders get trapped looking at the old trend direction, when instead they should be focused on finding trading opportunities in the reversal direction.
While the articles above contain guidelines on which consolidations to use for trading, the method is subjective. With multiple consolidations, it takes a lot of practice to “see” where the good trades are. I’ve used the methods for years, so I know what I am looking for. For those learning the strategies, it’s more difficult to see the trades as they forming and still have time to put out the required stop loss, entry, and target orders.
For new traders, applying an indicator to the chart may be of some help. The indicator(s) help spot the EURUSD trend and trade direction, gauge momentum, and highlight potential trade areas.
From the forex day traders I have worked with, I’ve noticed a couple problematic tendencies:
- Taking too many trades. In other words, every consolidation, pullback, or chart pattern looks like a reason to trade. It isn’t. Hopefully, the indicators will help traders better isolate the higher probability trade areas and avoid overtrading.
- Directly related to the problem above, often traders won’t be in the profitable move when it comes because they have wasted all their mental energy or capital for the day on trades that weren’t high probability.
These indicators may help isolate the trade areas which are higher probability, and where the price has more room to run in your favor. Even with an indicator, it may take two entries before the price moves in our direction. Another error traders make is taking losses personally. Trading is not easy. Sometimes everything looks right but the trade just doesn’t work out. After a loss, assuming everything still looks good, and we get another trade setup, take it.
Once you’ve practiced the method you likely won’t need the indicators, because the indicators are only helping you see what the price movements themselves are showing you. After all, an indicator is based on price movements. Rarely will it provide any insight that a trained eye wouldn’t see solely watching price movements.
I do not use indicators. I prefer trading off price action alone. That said, indicators can be beneficial when you start out. Test out the indicators below with your own trading. If they help you, use them. If they don’t help you, don’t use them, as indicators are not required for successful trading.
Indicators for Day Trading EURUSD
I am not a coder or indicator builder, so I have adapted existing indicators to my strategy. If anyone finds indicators that are better suited to the strategy, share your findings in the comments.
I have monitored the following indicators on the EURUSD 1-minute chart (my preferred time frame for day trading forex) and find they do a decent job of highlighting the trend and locating the general trade areas. No indicator is perfect, though. Notice I said a “decent job” and “general price area.” The indicator doesn’t tell you exactly when to trade, nor will it magically eliminate losing trades.
Understanding price action is still required. Sometimes, if there is a big move followed by a strong pullback the indicators might show a reversal, but based on the price action the prior trend is still intact. The video below shows a few examples of this. The indicators are just a guide; you still need to, use critical reasoning and always be planning ahead.
The first indicator doesn’t have to do with taking trades, but is handy for seeing when the various global sessions begin and end.
Session Highlighter: Ideally, day trade the EURUSD during the London session and/or the London and US overlap period. This indicator colors the chart a different color for each session. Having the sessions highlighted means you can easily scroll back and see exactly when you would have been trading.
If you want to set your charts up like mine (see image below), set your MT4 background to Black on White (white background). For the session highlighter colors, use Yellow for London and Medium Turquoise for New York. The overlap color will be a green by default. I find the price history easy to see with these colors. Change the colors to whatever you prefer.
I do use the session highligher tool, and find it helpful.
The following two indicators help spot EURUSD day trading opportunities.
The following indicators have settings, and those settings need to be adjusted to current market conditions. How do you know the right settings to use? Adjust them until you find the indicator useful. Remember, it won’t be perfect. Rather, you want the indicator to be useful most of the time. If it helps most of the time that is enough to likely improve your trading. As discussed, we will never be right all the time anyway.
The indicators will work for a certain amount of volatility. As volatility changes over time, the settings need to be adjusted. The Forex Stats page provides resources for tracking volatility. As long as volatility stays about the same, the settings don’t need to be updated. But once volatility starts changing, you will notice the indicators don’t work as well and this will require updating the settings to make it useful again.
If you calibrate the settings to work on the EURUSD 1-minute chart, the same settings may not work on a different forex pair, or on a different time frame. I typically only day trade the EURUSD on a 1-minute chart. The GBPUSD is also acceptable for day trading. Setup the indicators for the pairs and time frames you trade.
The Turtle Trading Channel – Indicators settings change over time. As an estimate, when volatility is around 135 pips per day a Trade Period (the primary setting on the indicator) setting of about 70 works. When volatility is 75 pips per day, a Trade Period of about 40 works better.
The setting for the Stop Period doesn’t matter, we aren’t using it.
Once the indicator is installed in MT4, go into Edit Indicator, click the Colors tab and change the Stop Period Lines to “None.” This will hide the Stop Period Lines. Keep the blue and red lines.
The Turtle Trading Channel provides the major trend direction. If the thick blue line is below the price, then the trend is up. Only take long trades.
If the thick red line is above the price then the trend is down. Only take short trades.
Defaults colors are DodgerBlue and Red.
The indicator does not provide trade signals. We still need to watch the price action to determine when to trade. The indicator just helps us determine in which direction to trade. It helps show the current trend.
I prefer analyzing the trend on my own, and not using this indicator. Although, it may help spot the trend and mean you have less to think when you are starting out.
Envelopes – Indicator settings vary as volatility changes.
When volatility is about 135 pips per day, consider the following settings: Period 50, MA method Simple, Apply to Close, Deviation 0.03%. Shift 0.
When volatility is about 75 pips per day, try: Period 25, MA method Simple, Apply to Close, Deviation 0.025%. Shift 0.
Tweak the settings as needed.
The Envelopes indicator may be used to provide a trade area. The envelope is not a trade signal. A consolation breakout or engulfing pattern still must form, signaling the price is starting to move in the anticipated direction. Envelopes are pre-installed on MT4 . To add them to a chart go Insert > Indicators > Trend > Envelopes.
If the trend us up, only buy consolidation breakouts or engulfing patterns that occur at, or slightly below, the lower envelope line.
If the trend is down, only short consolidation breakouts or engulfing patterns that occur at or below the upper envelope line.
Color for the Upper Band is DeepPink and Lower Band is Indigo.
I prefer analyzing the trend on my own, and not using this indicator. Although, it may help you spot potential trade areas when you are starting out.
If an envelope is well calibrated, pullbacks will often end near the upper line in a downtrend, or near the lower line in an uptrend. Combined with waiting for a consolidation breakout or engulfing pattern, the indicator can highlight favorable trading opportunities. There is one major problem though. During very strong trends, or when the trend accelerates, the price usually won’t pull back enough to signal a trading opportunity. This means that indicator may miss some of the biggest trading opportunities of the day.
An indicator will not make someone a better trader. It is just a tool that may be used if it helps you. Both the Turtle Channels and Envelopes are not perfect indicators. They won’t always provide great trading signals or eliminate losing trades. But they do give you a frame of reference. You can look at the trade signals that work out and the ones that don’t…then look at what is different between them. This will aid in developing the price action analysis skills necessary for skillful day trading.
Indicators for Day Trading EURUSD – Video Instruction
The video below shows the basic use of the indicators, how to set them up (per above) and how to use them in conjunction with reading price action. I’ll also show how day trading the EURUSD with the indicators may be a bit different than trading without the indicators. To be successful you don’t need to take the same trades as me; I have said many times on the site that my trading friends and I will often have opposite positions, but we can all end up profitable. If your entry is a bit different mine, or we trade different consolidations, it doesn’t really matter. We can all still be profitable at the end of the day as long as we are winning 50% of our trades (even 40%) and our winners are bigger than our losers.
With the indicator method, you’ll likely have fewer trades than if you trade off price action alone. For most people, that isn’t necessarily a bad thing. One of the most common problems is overtrading.
A news announcement that causes a big price move will result in temporary distortions in the indicators. Don’t trust these indicators after the price spiked or plummeted following a high impact news announcement. Therefore, get out of day trades at least two minutes prior to a high impact news announcement, and then trade off price action after it comes out. Alternatively, wait for the market to settle down a bit and for the indicators to start providing better signals before trading again.
The indicators are a tool, but can’t replace sound judgment. Not every signal the indicators say to trade is worth trading. Assess the risk and probability of the price reaching the target on each trade. That said, don’t be afraid of losing. We will have losing trades no matter what, so if the trade setup looks good, take it.
You will still need to put in work and a lot of practice time to become profitable, learning which trades to take and which ones not to. You may also add in a few additional guidelines, strategies, or indicators of your own.
Zig Zag Indicator
I am a fan of the zigzag indicator. It provides information on how big price waves are. Being able to see how many pips the prior pullbacks and trending waves have moved gives insight into where to look for entry opportunities and where to place targets.
All the zigzag indicator does is measure price moves. It draws a line between swing highs and lows, and ignores tiny fluctuations. This may also help new traders see the trend and major price waves more clearly. You can download the zigzag indicator that I use here. I like this version of the indicator because it shows how many pips each price wave (zigzag line) moved, as well as how many price bars it took to move that far. As mentioned earlier, these are two key elements I use in my trading: price magnitude and velocity.
I do use the zigzag indicator sometimes in my own trading. But usually, I find it just as easy to measure the waves myself. The benefit for new traders is that the indicator shows the major price waves and strips out some of the noise.
This video on day trading the EURUSD discusses how to use the zigzag indicator.
Save Your EURUSD Day Trading Template and Profile
Once you have everything set up the way you want it on the EURUSD chart (or GBPUSD), if you are using MT4, right-click on the chart > Template > Save As… and save the template as EURUSD Day Trading Indicators, or something similar.
Then click File > Profiles > Save As…and name the profile as EURUSD Day Trading.
The Template is how your specific chart looks. Open any new chart and you can quickly apply a pre-existing template to it (more useful for swing trading where you may want many charts with the same look).
The Profile is your window setup. If you day trade the EURUSD, only have the one chart for day trading.
If you also swing trade, set up a separate swing trading profile and template.
Final Word on Indicators for EURUSD Day Trading
As always, practice before you trade real capital. Generate at least two straight months of profits in a demo account, trading every day (same time of day, same strategy) before you make the switch to live. Switching to real capital means a lot more pressure, and the only thing that will help you handle that pressure is knowing exactly what you are doing…and being confident in it. Confidence comes from repeating something and seeing positive results. It may take some time to see positive results; stick with it. Read the 5 Step Plan for Forex Success.
By Cory Mitchell, CMT
To learn more about how to day trade forex, including basics to get you started (order types, currency pairs to focus on, defining trends…), 20+ strategies and a plan to get you practicing and successful, check out my Forex Strategies Guide for Day and Swing Traders 2.0. The book doesn’t cover indicators, rather it teaches how to trade based on price action, which is my preferred method of trading.