Forex trading signals and learning how to interpret them are the key to the success of any trader that is making money in the forex market. Learning the ins and outs of trading trends takes a lot of time, but you don't have to be an expert at it to be successful.

A more accomplished forex trader will spot the trend just as it begins and will see the slowing down and get out just as it is ready to decline. You don't have to be that good, you can get in once the trend is under way and get out just after it starts to decline and still make money. You just have to be able to recognize which way it is going.

Some of the common forex indicators used in may forex trend systems that successful currency traders will use are the MACD and moving averages. When effectively used as crossover indicators, you will have the ability to recognize significant trends that will of course lead to profits.

When analyzing a short term trend against a long term trend, i.e. an EMA (5) crossing an EMA (20), you will see a positive trend developing that you should take advantage of. The same is true of a MACD crossover.

Another powerful forex indicator designed for trading trends is the TRIX or Triple Exponential Moving Average oscillator. The indicator will keep you in trends that are shorter or equal to the window period. While observing a recent day of trading, we noticed a TRIX (15,9) moving upwards on the 4 hour chart of the GPB/USD pairing. The result of this trend was actually a 100 point rise by the end of the day. If you had the experience to spot this trend, you would have made a killing!

While these are but two of the forex trend systems that you can use that you can use to generate good forex trading signals, there are many more models that are very successful. Examples of these are indicators like the Supertrend and the ADX.

The Supertrend is extremely effective as its' sole design was to pinpoint trends in the currency market. You can only imagine by it's name how successful this has been. If you are using the ADX, it may be a little more difficult to read the trends, but it is just as useful when you know what you are doing and define ranges of profitability. For instance, when there are crosses in the 17 to 23 levels, I know it is a go. Movement in the DI+ and the DI- will let you know which side of the market to get on.

While you will hear people preach the positives of each of these forex trading signals on their own, becoming familiar with all of them is a good idea. Look at it as arming yourself with more weapons to go into battle with. Make sure a trend spotting forex strategy is part of your arsenal. The more forex indicators that you see a positive trend in, the more likely you are in spotting a legitimate trend that you can take advantage of.

Parabolic SAR or parabolic Stop and Reverse is one of the most visual technical indicator. The rising dots below the price action which move up when the price is moving up and hence indicating uptrend. The falling dots above the price action and moving down with the price when the price is falling and hence indicating a downtrend. When trend reverses and when the rising or falling dots hit the price action then it's the time to stop the trade and take a position in the opposite direction. Stop and Reverse.

But is it really so simple?

The answer is "No". Parabolic SAR does not indicate the trend and hence we can not take buy positions when the dots are below the price action or vice versa.

Then how to use parabolic SAR?

Well, As the name suggests, The Parabolic SAR helps us in the following:

1) Putting the trailing stop-loss orders.
2) Exiting the trade when the SAR indicates that its time to stop and reverse the direction.

But well, as we mentioned above that both of the above statements are not as simple as they seem and hence before getting a better feel of the above points let's see when the Parabolic SAR indicator works and when it should be neglected.

Rule #1: Parabolic SAR works better in trends but should be neglected when price is having a sideways movement.

So how do we ensure the application of rule #1?
Well, the rule #1 can be applied by confirming whether it is a trend or not.

Confirmation of the trend:

Whether there is a clear trend or not can be ascertained one or a combination of the flowing:

1) ADX: ADX should be above 25 and rising.
2) MACD: For uptrend a bullish MACD i.e. MACD line crossing over the signal line. For downtrend the MACD crossing below the signal line.
2) Slow or Full Stochastic: Bullish Stochastic i.e. stochastic line crossing over the signal line for uptrend and bearish stochastic i.e. the stochastic line crossing below the signal line.

Now once we have confirmed that there is a trend in a particular direction, we are comparatively safer to use SAR as follows:

1) Putting the trailing stop-loss orders:

If the dots are emerging below the price action and we have a long position then we can move our stop-loss levels up at the level of rising dots. We can simultaneously raise our take profit targets. We should do this by keeping an eye on the other indicators mentioned above for reconfirmation that the trend is keeping up. The same is true with short positions. We continuously move our stop-loss levels to the level of dots moving down with the price. We can also move our take-profit levels further down if other indicators are showing that the trend not slowing down.

2) Exiting the trade when the SAR indicates that its time to stop and reverse the direction:

let's say that we have a long (buy) position during an uptrend. The SAR dots appearing below the price actions are also moving up. This movement is initially slow but becomes faster with time and the dots come closer to the price action. There is some correction and price moves down. The moment the moving up dots hit the moving down price, SAR indicates that it may be safer to close down the position as the price may go further down. We can close our long position and open a short position. BUT WAIT. Confirm the downward trend with the above mentioned indicators and if they are not confirming a developing downtrend then please do not open a short position. So Stop and don't reverse.

The same is true with short positions during downtrend. The price is falling down and the dots are over the price action and moving down. When price reverses the direction and falling dots hit it, it indicates taking profits by closing the position.

No indicator can give all correct signals all the time and hence continuous refinement in the strategies to use an indicator is a must to avoid as many false signals as possible. Getting a few signals which are good is always better than getting a lot of signals of poor quality.

Moving average convergence divergence MACD is used very commonly in technical analysis for trading. MACD is a lagging indicator and that means that any signals by the crossover of MACD and its signal line are generated with some lag in time. The signals are generated after a confirmation of the move in a particular direction this comes with a time lag. When the trend is weaker, this lagging would tend to cause more false signals.

Why more false signals during weak trends or when the market is ranging or running sideways?:

1) Entry signal: By the time the entry signal is generated, the price may be reaching the reversal point because during the time lag the trend becomes further weaker and market is on the verge of reversal.
2) Exit Signals: By the time the reversal crossover takes place and signals that we should close our position to take profit, the price already reverses so much that the realized profits levels are much less than the realization levels if would have closed the trade sooner.

Though the most important factor in trading are the skills, knowledge and trading discipline but there are always possibilities of improving our indicators also. The improvement can be either by the change in the logic by adding new conditions or by experimenting with different period settings. What we wish to always achieve is to have lesser and lesser percentage of false signals. Albin, Gunter and Kain came up with some refinements in the original MACD for reducing the percentage of false signals which may otherwise be generated. The first refined version is known as MACD R1 and the second is MACD R2 as the subsequent one.

Let's check what MACD-R1 and MACD-R2 are. Our trading platform most probably will not have these refined versions but considering the logics of these, we may think about improving our MACD trading strategies.

MACD-R1:

a) One more condition was added and that was to wait for three periods (days on daily chart) after the MACD line crosses the signal line upwards or downwards before we take a position. This wait was to ensure that the signal was not false and an immediate reversal does not take place as soon as we take a position. If during this 3 periods another crossover takes place then we forget the first crossover and wait for another 3 periods to ensure this reversal.

b) To avoid the exit problem as mentioned in point number 2 above, MACD R1 has the profit taking levels as pre-decided percentages. In a nut and shell it says that don't be greedy and come out of a trade with certain pre-decided percent of profits. These suggested profit taking percentages were 3% or 5%. So MACD R1 says that close the trade after 3% or 5% gain after the entry. In case a reversal crossover takes place before this pre-decided target of 3% or 5% then also we should close the trade.

MACD-R1 - weaknesses:

1) Even with these additional conditions there still is higher number of false signals.

2) Loss in the profits: Lets assume that it is a strong uptrend and after taking a buy position the prices move up by 8%. And what we did was, we closed the position after 3% or 5% profit and hence the opportunity of making higher gains was lost. basically we may end up in making a big loss in the profit and that goes against the mantra that let your profits run and cut your losses short.

MACD-R2:

To overcome the above mentioned issue of still higher number of false signals by MACD R1 an additional condition was added in terms of further refinement. The new refined version is known as MACD-R2.

Lets think why MACD-R1 still offers possibilities of reducing the false signals:

Scenario: We wait for 3 periods to have the confirmation of the trend continuation by seeing that no reversal crossover takes place during this waiting period. And after this 3 periods we enter the market. As soon as we enter the market, a reversal takes place and we end up with losses.

Now let's see why the above mentioned scenario is possible and what did we miss to avoid it:

This can happen because we waited for the confirmation but ignored another warning signal i.e. what did not happen may happen soon now.

This may happen because though by the end of the 3 periods after the original crossover, another reversal crossover does not take place but the MACD line comes dangerously close to the signal line to indicate a reversal. The difference between the MACD and signal line reduces drastically. We are not keeping track of this development and ignore this reducing difference between MACD line the signal line even though it indicates the possibilities of a reversal crossover.

What additional changes/conditions are there in MACD-R2:

Now when we know what we missed, we have to add that condition so that we do not lose the track of the reducing difference indicating a reversal.

An additional condition was added apart from the original concepts of MACD-R1 to design MACD R2. This condition is to ensure that we keep a track of the difference between the MACD line and the signal line and do not ignore a warning signal of a possible reversal. This condition ensures that a pre-decided difference maintains between MACD and MACD signal line even after waiting for 3 periods and then only we enter the market. If the difference between MACD line and the signal line goes lesser than the pre-decided level then we do not enter the market.

Suppose we decide that the minimum difference between MACD and signal line should be at least 1.2% at the end of 3 periods. What it means is if the difference between these two lines is less than 1.2% then should not take trade position. We decide this difference percentage based on the experience that a difference less than this may indicate a possible reversal.