Prepared by Peter, who writes:
I have been going through many of your site's strategies looking for those that appeal to my beginner's eye and trading plan. During the course of this study, I came to the conclusion that most systems are virtually momentum or trend (or both) based, but with different levels of sophistication. I also realised that, regardless of all my previous FX studies, I really did not have a good knowledge of the difference between these indicators - or the vast range available.
I have attempted to explain the very basics of indicators as well as provide tables of some (not all) indicators - sorted according to their purpose (Momentum, Trend, Volatility, etc). I found that once I had a better understanding of the various indicator categories, it made system development/selection "easier".
All markets, including Forex markets, have only three phases:
In simple terms, these three phases can be reduced to two:
Indicators are designed to perform these tasks:
It is very important to understand what each indicator is measuring and what these measurements mean in the context of FX trading.
Remember, the ONLY reason indicators are used is to assist the trader in predicting price movements. They have no other use – AND – they must be used in conjunction with price charts and, in most circumstances, a different type of indicator. In other words, they must be only a part of the trading rules in any trading system and trading plan.
It is also important to understand that no single indicator is suitable for all market phases (or currency pairs, time of day, or specific international exchange).
The names of all indicators listed below were copied from the GFT FX Trading Platform.
|Momentum Indicators||Suitable for FX?|
|It is unknown if the MetaStock indicators without a “Yes” are in fact suitable for FX trading. If you use them, please share your views.|
|Accumulation Swing Index||Yes|
|Centre Gravity Oscillator||Yes|
|Chande Momentum Oscillator||Yes|
|Commodity Channel Index||Yes|
|DiNapoli Detrend, DPO||yes|
|DiNapoli Preferred Stochastics|
|Dynamic Momentum Index||Yes|
|Intraday Momentum Index||Yes|
|Linear Regression Slope||Yes|
|Random Walk Index|
|Rate of Change (ROC)|
|Relative Momentum Index|
|Relative Strength Index||Yes|
|Relative Vigor Index|
|Schaff Trend Cycle||Yes|
|Schaff Trend Momentum|
|Schaff Long Term Momentum|
|Stochastic Momentum Index|
|Stochastic Oscillator Fast||Yes|
|Stochastic Oscillator Slow||Yes|
|Stochastic Oscillator Full||Yes|
|Williams’ Accumulation/ Distribution||Yes|
|List courtesy of MetaStock User Manual & GFT FX Trading Platform|
These indicators are usually called momentum oscillators because the indicator line or histogram “oscillates” (or swings) up and down between or around specific values – much like a sine wave on an oscilloscope.
Various oscillators are calculated by different formulas, but they are all based on the relationship of the current price to previous prices for a specified period of time. Therefore, oscillators are lagging indicators (backward looking) and have no predictive use. Price confirmation must occur before entering a trade.
Momentum indicators work best in ranging markets. They tend to give false signals during breakouts and trends – especially when using hourly or shorter timeframe charts. Experiment with the parameters for various oscillators – remember, lower parameter numbers and shorter chart timeframes will give quick responses to price changes BUT with many false signals.
Momentum oscillators measure the rate of change of price movements (or the speed of price changes). Because FX volume cannot be easily measured, momentum indicators serve a valuable purpose in that they reflect market interest – as does volume in other instruments.
The theory is that a change in momentum tends to lead to a change in price.
Oscillators are used to help determine if a price movement:
Momentum values can be interpreted as follows:
The steepness of the oscillator line or lines (or rate of change) is always significant.
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