Forex indicators (Part 2)
Oscillators have ranges of values and in many cases, the extreme high and low values are termed as “overbought” and “oversold” respectively. There is usually an upper and lower line on the charts; these lines indicate the overbought and oversold zones for the indicator.
Because an indicator enters a zone, it does not usually mean a price reversal is expected. During sustained trends, prices may remain in either zone and continue to move higher or lower. Typically, extreme price movements may occur when momentum is in a zone.
Buy or Sell signals are usually indicated if the oscillator moves out of a zone. However, remember that momentum is only an indicator, wait for confirmation of trend changes by actual price movements.
Also note the benefits of divergence between momentum and prices.
The three main momentum indicators (allegedly) used by FX traders are:
1. The Relative Strength Index (RSI) oscillator,
2. The Stochastic oscillator,
3. The Moving Average Convergence Divergence (MACD) oscillator, which is not really a momentum indicator but a number of moving averages, but it works like a momentum indicator).
The RSI is a single line indicator and the strongest signals are given when the line leaves a zone (also, divergence with the price is a stronger signal). See tables below for more indicators.
Trend Indicators (Line Studies)
|Trend 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.|
|DiNapoli MACD Predictor||Yes|
|Directional Movement ADX||Yes|
|Linear Regression Slope||Yes|
|Moving Average Exponential||Yes|
|Moving Average Modified||Yes|
|Moving Average Simple||Yes|
|Moving Average Triangular||Yes|
|Moving Average Weighted||Yes|
|Polarised Fractal Efficiency|
|Raff Regression Channel|
|RCI (Rank Correlation Index)|
|Standard Deviation Channel|
|Standard Error Bands|
|Standard Error Channel|
|Time Series Forecast||Yes|
|Vertical Horizontal Filter|
|List courtesy of MetaStock User Manual & GFT FX Trading Platform|
Always trade with the trend – it is your only friend!
The most difficult part is identifying a trend - especially in multiple timeframes. Any trend in any timeframe represents a trading opportunity in that timeframe.
The easiest thing to do is to draw trend lines (simple indicators) on a chart – then what?
Remember that momentum indicators are virtually useless in trending markets.
There are many indicators designed to identify trends. Therefore it is appropriate to define the word trend for the current discussion (also for any timeframe).
Uptrend: each successive high is higher than the previous high.
Downtrend: each successive low is lower than the previous low.
Trend indicators are the most basic and widely used indicators for:
• Verifying existing trends,
• Identifying emerging trends,
• Generating trading signals.
Two main trend indictor categories (allegedly) used by FX traders are:
1. The Directional Movement Indicator System (DMI) incorporating the ADX indicator,
2. Moving Averages (MA’s), which include:
a. Simple moving averages,
b. Exponential moving averages,
c. Weighted moving averages.
However, from the tables below, it is obvious that there are a great many available.
The periods over which the moving averages are calculated are important as they must relate to the chart and trading timeframe. Traders must experiment to find what bests suits their trading rules and system.
The two basic principles of using moving averages for trend identification are:
1. In an uptrend, prices are above the moving average,
2. In a downtrend, prices are below the moving average.
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