A Technical Indicator is a series of data points used to predict movements in currencies. Have a look on the most popular technical indicators of the Forex and learn how to build your own and adapted technical indicator.
Relative Strength Index (RSI)
Stochastic Oscillator
Moving Average Convergence Divergence (MACD)
Number theory
Waves
Gaps
Trends
Chart formations
Relative Strength Index (RSI):
This index is a popular indicator of the Forex (FX) market. The RSI measures
the ratio of up-moves to down-moves and normalises the calculation
so that the index is expressed in a range of 0-100. If the RSI
is 70 or greater then the instrument is seen as overbought (a
situation whereby prices have risen more than market expectations).
An RSI of 30 or less is taken as a signal that the instrument
may be oversold (a situation whereby prices have fallen more
than the market expectations).
(click on graph to enlarge)
Stochastic Oscillator:
This is used to indicate overbought/oversold conditions on a
scale 0-100%. The indicator is based on the observation that
in a b up trend, closing prices for periods tend to concentrate
in the higher part of the period’s range. Conversely,
as prices fall in a b down trend, closing prices tend
to be near to the extreme low of the period range.
Stochastic calculations produce two lines, %K and %D which are
used to indicate overbought/oversold areas of a chart. Divergence
between the stochastic lines and the price action of the underlying
instrument gives a powerful trading signal.
Moving Average Convergence Divergence (MACD):
This indicator involves plotting two momentum lines. The MACD
line is the difference between two exponential moving averages
and the signal or trigger line which is an exponential moving
average of the difference. If the MACD and trigger lines cross,
then this is taken as a signal that a change in trend is likely.
Number theory
Fibonacci numbers:
The Fibinacci number sequence (1,1,2,3,5,8,13,21,34…..)
is constructed by adding the first two numbers to arrive at the
third. The ratio of any number to the next larger number is 62%,
which is a popular Fibonacci retracement number. The inverse
of 62%, which is 38%, is also used as a Fibonacci retracement
number. (used with the Elliott wave theory, see hereunder)
Gann numbers:
W.D. Gann was a stock and a commodity trader working in the 50’s
who reputedly made over $50Mio in the markets. He made his fortune
using methods which he developed for trading instruments based
on relationships between price movement and time, known as time/price
equivalents. There is no easy explanation for Gann’s methods,
but in essence he used angles in charts to determine support
and resistance areas and predict the times of future trend changes.
He also used lines in charts to predict support and resistance
areas.
Waves
Elliott wave theory:
The Elliott wave theory is an approach to market analysis that
is based on repetitive wave patterns and the Fibonacci number
sequence. An ideal Elliott wave patterns shows a five wave advance
followed by a three wave decline.
Gaps
Gaps are spaces left on the bar chart where
no trading has taken place.
- An up gap is formed when the lowest price on a trading day is
higher than the highest high of the previous day.
- A down gap is
formed when the highest price of the day is lower than the lowest
price of the prior day. An up gap is usually
a sign of market strength, while a down gap is a sign of market
weakness.
- A breakaway gap is a price gap that forms on the completion
of an important price pattern. It signals usually the beginning
of an important price move.
- A runaway gap is a price gap that
usually occurs around the mid-point of an important market
trend. For that reason, it is also called
a measuring gap.
- A exhaustion gap is a price gap that occurs
at the end of an important trend and signals that the trend
is ending.
Trends
A trend refers to the direction of prices. Rising peaks and
troughs constitute an uptrend; falling peaks and troughs constitute
a downtrend, that determine the steepness of the current trend.
The breaking of a trendline usually signals a trend reversal.
A trading range is characterized by horizontal peaks and troughs.
Moving averages are used to smooth price information in order
to confirm trends and support and resistance levels. They are
also useful in deciding on a trading strategy particularly in
futures trading or a market with a b up or down trend.
For simple moving averages, the price is averaged over a number
of days. On each successive day, the oldest price drops out of
the average and is replaced by the current price- hence the average
moves daily. Exponential and weighted moving averages use the
same technique but weight the figures-least weight to the oldest
price, most to the current.
Chart formations
Examples of chart formations: (triangle, rectangle, head and
shoulders):
