The Spectrum Of Technical Indicators

The intense, volatile nature of Forex trading requires that a host of technical indicators be available for traders to consult in planning their investment strategies. Data from the market arrives constantly and without pause, twenty-four hours a day, and just looking at raw numbers provides little insight into the trends that shape trading. Following is a review of some common technical indicators that every trader should be familiar with.

Moving Average

A Moving Average simply charts the average price of an issue over a finite period of time. This can be charted in two ways: as a Simple Moving Average (SMA) or an Exponential Moving Average (EMA). The SMA graphs average price at specific intervals, whether hourly, daily, or longer. The EMA applies additional formulas in order to attach increased significance to more recent data; the resulting tool is particularly useful in spotting and exploiting trends.

Forex trading software will use the Moving Average to generate buy and sell signals. When the current price rises above the Moving Average, the software will signal a buy. When the reverse occurs, and the current price wanders below the Moving Average, a sell signal is generated.

• Bollinger Bands are used as technical indicators in the market for stocks and bonds, and as such should be familiar to novice Forex investors. Bollinger bands note the Simple Moving Average (SMA), as well as the standard deviations from the SMA. Issues of high volatility are represented by a wide band, while less volatile performance is indicated by narrower bands. When the current price is located in an upper band a sell signal is generated, and when the current price falls into a lower band, a signal to buy is given.

• Relative Strength Index (RSI) is measured from zero to one hundred. The higher the RSI, the more likely a currency is to decrease in value, and an RSI over seventy notes a definite trend toward falling prices. A smaller RSI indicates a potential rise in value (particularly if the RSI is below 30). There are two additional important notes regarding the RSI. When a new high price is not matched by a new high RSI, a ‘divergence’ has occurred. And a sustained downward trend may be indicated by a ‘failure swing,’ which occurs when the RSI bottoms out below a recent low.

More Technical Indicators

There is an entire spectrum of additional technical indicators culled from an abundance of trading data and deciphered daily by adherents around the world. Without getting into too much detail, some of these indicators are Money Flow Index, Parabolic SAR, Momentum, Stochastic Oscillators, On Balance Volume (OBV), and Moving Average Convergence/Divergence (MACD). As you gain experience in the Forex market, you will be able to determine which of these indicators can prove most helpful to you.

The complex mathematics behind these calculations are not important to the average investor, and are best left to the experts. What is important is that you know how to read these technical indicators, what to do with them, and how they may impact your investing activity. Once you have mastered these technical indicators, you will be well on your way to reaping a profit on the Forex trading market and making your financial dreams come true.