The world of currency trading is a chaotic one, driven by the collective psychology of traders, hedge funds, and automated “black boxes” that have been programmed to look for the same trends and signals that a human would recognize. For the individual trader to survive in this ever-changing milieu of ebbs and flows, he must gain helpful insights as to the strength of a trend or the momentum of its direction in order to place his trades properly. Technical analysis, though not perfect, is the means to this end. It is an invaluable tool that transforms mountains of data into usable guidance information.
The beauty of technical analysis is its flexibility. Once learned, its skills can be applied across a host of investment vehicles and across a host of timeframes as well. The long-term, “buy-and-hold” investor can use it to optimize the timing of his purchases, while the day or swing trader can use it over timeframes that vary from minutes to hours to achieve the same objectives. TA is not perfect. It can produce false signals, but its consistency has been proven many times over, and consistency, or in other words an “edge”, is all that a forex trader needs to gain an advantage of his own.
Forex indicators are the “bread and butter” of technical analysis. There are literally thousands of them that have been designed to measure some facet of market behavior. Traders do have their favorites. A few popular ones are presented in the chart below:
This chart depicts the price behavior for the U.S. Dollar weighted index over the past few months. Forex trend indicators appear in the upper part of the chart, while three popular forex trading indicators are illustrated on the bottom portion of the diagram. There are no less than six forex indicators shown above, and an aspiring trader would do well to research each one on the Internet to gain a deeper understanding of each one’s benefits. Here is a brief description of each:
- Candlestick Formations: The little red, clear and black boxes present pricing information for each trading period requested, “daily” in this case. These “boxes” have been used for centuries, and an experienced trader can glean much information from recognizing familiar patterns;
- Moving Averages: The red and green lines represent 20- and 50-day moving averages, known as lagging indicators. Significant signal points are when these two lines cross each other;
- Bollinger Bands: The two blue lines and dotted mid-line are statistically derived values of predictable limits for price behavior. Contractions or the movement of prices over or below the mid-line are common signals;
- Commodity Channel Index (CCI): This forex indicator is known as an oscillator and is a leading indicator. It attempts to signal an overbought condition when over the “100” line, or an oversold condition when below the “-100” line;
- Relative Strength Index (RSI): The RSI is another form of oscillator that measures relative changes between higher and lower closing prices, producing trading signals similar to the CCI that is more sensitive;
- Moving Average Convergence-Divergence (MACD): This indicator consists of two exponential moving averages. Their intersections often confirm the trends that the other oscillators predict.
Forex technical indicators involve complex calculations using real time market data. Today’s sophisticated software programs do the heavy computation work. As with all trading tools, however, experience is required. Pattern recognition and TA signal interpretation is an art form that requires time and study to be useful at a high level. An aspiring trader can only benefit from time invested.
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