Forex Technical Indicators

To make sense out of the dizzying array of currency moves in the foreign exchange (forex) market, traders use a variety of tools and techniques. Many of these come from the field of technical analysis. This is nothing more than analyzing past currency movements under a variety of conditions to predict future movements. Technical analysis organizes prior data into charts. The heavy use of charts in technical analysis has led to technical analysts being given the name of “chartists.” These analysts focus completely on current and past price movements. They do not care about the fundamentals of a currency, such as interest rates, Gross Domestic Product (GDP growth rate) or inflation rates.

Technical indicators abound in forex, and many have their own names: Bollinger bands, double tops, double bottoms and momentum are a few examples. Technical analysts use these indicators as signals for when to enter and exit a position in a given currency. Every analyst has their favored indicator or indicators.

Bollinger Bands

Bollinger bands are a series of tags used to discern trends within a particular currency pair. These bands provide indications of when to buy and when to sell. The price of a currency pair fluctuates within a certain range. Bollinger bands attempt to define the upper and lower reaches of this range, to the point of identifying overbought and oversold conditions. Traders sell when the pair hits the upper band and buy when it hits the lower band. Unfortunately, Bollinger bands are notorious for leading traders on wild goose chases. They are calculated by a complex mathematical formula. The advantage of these bands is that they can expand and contract with volatility, providing a neat method for measuring a trend.

Double Tops and Double Bottoms

Technical analysis revels in using words like “resistance,” “attack” and “level.” The phenomenon of double tops or double bottoms occurs when a currency pair experiences two tops or bottoms in a row. A double top is taken as a fairly reliable signal to sell, while a double bottom indicates the opposite. They signal the opportunity to take profitable countermove positions. The problem with these indicators is identifying them in real time, enough time to make a profitable trade. This is difficult if not impossible. They are frequently most visible after the fact. Traders have to make the choice whether to anticipate them or react to them after they have formed.

Momentum

This is a critically important concept in technical analysis. Momentum is the rate of acceleration of a currency pair’s exchange rate. The greater the rate, whether the direction is up or down, the more momentum should be taken into account. Measuring momentum can be done using a variety of indicators: a commodity channel index, a stochastic oscillator, a commodity channel index or the moving average convergence divergence histogram. These tools provide traders with a way to gauge momentum, which can provide early clues as to sudden changes in price later on. Following momentum is a great way to make profits.

 

For more information about learning these and other indicators, contact Lucror FX at www.lucrorfx.com.

 

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