Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we are going to be looking at technical indicators specifically as well as their practical application. Chart analysis tools are referred to as Technical Indicators. Technical Indicators in the forex market are used for measuring or forecasting as well as trend following, tracking price oscillation, measuring volatility, and finding support and resistance levels. By Grouping indicators based on what they do at a base level we can accelerate the learning process and gain a overall understanding of them in a shorter span of time.
Upon first discovering and reviewing the library of available indicators that can be applied to your charts you may be generally overwhelmed by the sheer amount that are available.The jargon and abbreviations alone surrounding some of the names is enough to confuse most people. Attempting to learn all of the available indicators seemingly was a impossible task until you realise one thing.
A lot of these indicators are VERY similar to each other, and if you understand the primary groups that certain indicators fall into then you can take a understand one understand all outlook within their respective groups. Let’s now take a look at the groups of technical indicators and outline what they basically do.
Trend following indicators were created to help traders identify markets that are actively trending in any particular direction. These indicators can help us point out the overall direction of a trend and can inform us by using a correlation of data if a trend actually exists.
Moving Averages or MA for short are very popular and strategies are developed around them. It is a technical tool that averages a currency pair’s price over a period of time. The smoothing effect this has on the chart helps give a clearer indication on what direction the pair is moving. There are a variety of moving averages to choose from and parameters to adjust within but Simple Moving Averages and Exponential Moving Averages are by far the most widely used.
Ichimoku is a very complicated looking trend assistant that is actually much simpler to utilise than it initially appears.
The Ichimoku tool is a Japanese indicator and was created to be a standalone indicator that shows current trends, we never just use one indication to trade but this indicator encompasses support/resistance levels, and indicates when a trend has likely reversed. The word Ichimoku loosely means one glance and the tool is meant to be a quick way to see how price is behaving on a chart.
The Average Direction os a different breed of trend analyser. It doesn’t tell you whether price is trending up or down as conventional trend indicators do. However it does distinguish between wether a pair is ranging or trending. This makes it the perfect filter for either a range or trend strategies by making sure you are trading based on current market conditions.
Oscillators give us a picture of how momentum is developing within a specific currency pair. When price moves higher, oscillators will reflect this by moving higher and When price moves lower the oscillators will move lower.
Whenever oscillators reach the extreme levels then it might be time to look for price to revert to the mean. Although when an oscillator reaches its Overbought or Oversold levels that doesn’t mean we should make a decision on wether to buy or sell just based on that piece of evidence as Oscillators can remain at extreme levels for extended periods of time.
The Relative Strength Index is possibly the most popular oscillator used in technical analysis. Simply put It measures the ratio between the average gain and average loss over the last 14 periods. The RSI has a range between 0 – 100 and is considered overbought above 70 and oversold when below 30.
Traders will look to sell when 70 is crossed from above and look to buy when 30 is crossed from below. Again this is not a valid stand alone tool for entry.
Stochastics offer us a different way to calculate price oscillations by tracking how far the current market price is from the lowest low of the last number of periods defined by you. The distance is then divided by the difference between the high and low price during the same number of periods.
The stochastic will display two lines moving between 0-100 with overbought and oversold levels at 80 and 20. Traders often wait for the two lines to cross each other while in overbought or oversold territory and additionally they can look for divergence between the stochastic and the actual price for a signal to enter a trade.
Another non traditional oscillator is the Commodity Channel Index, its different to many oscillators because there is no limit to how high or how low it can go. It uses 0 as a centerline with