Technical Indicators In Forex Trading Part II

A technical indicator offers an objective and calculation-based method to analyze a currency pair and its price. Since technical analysis involves analyzing and understanding the historical price and/or movement of currency pairs, technical indicators are also known as delayed indicators.

To know about the two basic and most significant indicators for technical analysis, click here.

The other two important groups of technical indicators are:

Trend Indicators: These indicators allow traders to follow market trends and signal the closing of a trading position when there is a trend change. However, in a market that does not follow trends, price volatility in the sideways, horizontal direction can lead to several money-losing signals (whipsaws). Some examples of trend indicators include Moving Average, Moving Average Convergence & Divergence (MACD).

Non-trend following Indicators or Oscillators: These indicators are vital for analysis in non-trending markets and include Momentum, Relative Strength Index (RSI), Stochastic Oscillator and Commodity Channel Index (CCI).

Trend Indicators:
Moving Averages: eliminate price volatility and fluctuations related to volume and focus on the direction of a trend. This indicator can also be used to construct other indicators, such as the stochastic and MACD indicators. Generally, the closing price is used to calculate all moving averages, although different moving averages place emphasis on different types of currency data. Sometimes, even the average of Open, High, Low & Close (OHLC), and High and Low are used to calculate moving averages.

The three main types of moving averages are:
• Simple (Arithmetic)
• Linearly Weighted
• Exponential

Other types of moving averages include:
• Triangular
• Variable
• Volume adjusted
• Time Series

Calculation of the three main types of moving averages:
Simple (Arithmetic): is calculated by adding closing prices of a currency pair and dividing the sum by the number of periods. For instance, a five period simple moving average is calculated by adding the last five closing prices and dividing the sum by five.
Linearly Weighted: is calculated by placing emphasis on the priority of the latest data. For example, using five periods, the linearly weighted moving averages will be calculated by multiplying the fifth (the last closing price) by five, the fourth closing price by four and so on, then adding the result of each multiplication and dividing the total sum by the sum of multipliers (Here, sum of the multipliers = 5+4+3+2+1 = 15).
Exponential: follows the linearly weighted moving averages method but uses percentages in place of multipliers. It assigns percentages according to the weightage of the most recent data.

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