Technical Indicators for Forex Beginners

Technical indicators are statistics of past market data base on different mathematical calculations. Traders use technical indicators extensively in technical analysis to predict the continuance and the reversals in currency trends.

There are two major types of technical indicators: trend following indicators and oscillators

  • Trend following indicators reflect the direction and the strength of the current trend. Traders may enter a position when the trend following indicators showing the current trend is having solid strength. The most common trend following indicators are: moving averages and bollinger bands.
  • Oscillators are indicators banded between two extreme values that reflect short-term overbought or oversold conditions. In general, as the value of the oscillator approaches the upper extreme, the currency is said to be in an overbought condition, and as it approaches the lower extreme, the currency is consider to be oversold. Traders may exit a long-trade when the oscillators showing the current price is in an overbought condition, or they can exit a short-trade when the oscillators approach the lower extreme. The most common oscillators are: Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and Stochastic.

Nowadays, most charting packages include the above common technical indicators. Traders can find a charting package and add their favorite indicators to their charts. Traders tend to use a mix of trend following indicators and oscillators. They usually pick one from each category as the main reference. Most of the forex charting packages offer real-time streaming pricing. At the same time, all the calculations of the indicators are done automatically and instantaneously.

The following sections will introduce the common indicators mentioned above. Readers can choose their preferred indicators or a combination of them after knowing how they work.

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Contents

I: INTRODUCTION

II: MOVING AVERAGES

  • WHAT IS MOVING AVERAGE?
  • SMA, EMA AND WMA
  • APPLICATIONS OF MOVING AVERAGE
  • LIMITATIONS OF MOVING AVERAGES

III: BOLLINGER BANDS

IV: MOVING AVERAGE ENVELOPES

V: MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)

  • 1. Detect overbought/oversold levels
  • 2. Crossovers
  • 3. Divergences

VI: RELATIVE STRENGTH INDEX (RSI)

  • 1. Detect overbought and oversold condition
  • 2. Spot Divergence

VII: MOMENTUM

  • 1. Detect overbought/oversold conditions
  • 2. Spot divergence
  • 3. Crossing the central line

VIII: STOCHASTICS

  • 1. Detect overbought/oversold levels
  • 2. Crossovers

XII: CONCLUSIONS

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