Technical Indicators of the Forex Market

June 8, 2009 by  
Filed under Forex Trading

If you’re trying to delve into the world of Forex trading, you’ve already seen the intimidating charts and graphs that can seem to make the entire process more stressful than necessary. There are a few technical indicators, arrived at through algorithms and mathematical formulas, to help you make sense of all of the information before you.

These calculations are performed for you by virtually any Forex trading software, but you should have a basic understanding of what they mean to your buy and sell actions and inherent risk in the Forex market.

All of these technical indicators should be used together in order to arrive at your own conclusions. Keep in mind there is no certain indicator that will provide a black-and-white signal for you, but you can arrive at the most likely pattern forming and thus future behavior with them.

Moving averages are charted to show you a line graph that is moving to indicate if the currency pair you’re considering is in a general up or down pattern. These averages will change over time, so they constantly need to be updated and revisited. Usually, you’ll notice calculations of a Simple Moving Average (SMA) or Exponential Moving Average (EMA).

SMA is calculated as the average of prices at certain intervals of time, which could be hourly or daily. EMA actually assigns weights to different prices, determining some to be more relevant to current trends than others. EMA calculations usually place more weight on the most current prices, and less on the older ones.

These moving averages can indicate a buy signal if the current price rises above them, indicating an upward trend. When the price falls below this line, it indicates a selling position and falling market.

Bollinger bands are extremely complicated in the way they are arrived at, but will help to arrive at predictions about the current volatility of the Forex market. Calculated as a standard deviation from the moving averages, a wider Bollinger band indicates higher volatility, and a narrow one means less so. Usually, prices will fall within the two lines of the bands; if price moves outside of them, it is likely the current Forex market trend will continue, but if they stay within, a sharp price change can typically be expected.

When price is above the moving average and very near the upper Bollinger band, this is considered a sell signal. Conversely, investors are encouraged to buy when price is moving toward the lower band.

The RSI, or Relative Strength Index, is a value from 1 to 100 that serves as an indication of whether a currency pair is being oversold or overbought. Think of your elementary lessons of supply and demand here – an RSI of 70 indicates overbuying, and the pair is due for a price reversal. An RSI of 30 indicates it is oversold, and demand is down.

Study these technical indicators to help you along the way in your Forex trades, and you’ll notice a great change in the consistency of your results!