Technical Indicators

There are a lot of technical indicators and every trader can create his/her own indicators, therefore we confine ourselves to enumerate the main ones.

Moving Average. This indicator is the simplest and most popular in technical analysis (including FOREX). Moving Average belongs to trend indicators and it helps identify the beginning of a new tendency and its completion. According to its tilt angle we can define the power (speed of movement); Moving Average is used in huge number of other technical indicators as a basis or smoothing factor. Sometimes Moving Average is called a trend line.

One of derivative modifications of Moving Average is Weighted Moving Average. It represents arithmetic weighted fluctuations of prices for a certain period of time. As an analytical instrument it removes some shortcomings of Simple Moving Average but not all. There are a lot of modifications of Weighted Moving Average which use different variants of weight calculation.

As it was discussed before, different moving averages smooth price data and make trend identification simpler, what is important in volatile market.

In order to reduce lag when using moving average, technical analytics often use Exponential Moving Average (EMA). EMA reduces lag attaching importance to the last prices compared to remote ones. It allows of quicker reaction to current changes in prices compared to Simple Moving Average. The important attached to the last price depends on the period of Moving Average. The shorter period of EMA, the greater importance of the last price.

Moving Average Envelopes consist of 2 Moving Averages. One of them is displaced up and the other is displaced down on a certain percent called a coefficient of envelope. Sometimes the third line from which displacement takes place is drawn. It is considered that envelopes determine the boundaries of normal price fluctuations of a currency pair. The principle of use of this indicator is the following: the price always comes back to its main trend (to its central moving average) after some fluctuations.

Bollinger Bands can be determined as a technical indicator which is similar to Moving Average Envelopes but based on current market volatility. Unlike Moving Average Envelopes, Bollinger Bands are measured not only in accordance with the direction of price movement but the type of this movement (speed of price movement). This indicator makes statistical estimation of how far short-term movement can go before it comes back to the main tendency.

Average Directional Index (ADX) is a technical indicator which estimates trend power and determines whether the trend would continue or become weaker. In fact, ADX belongs to the category of oscillators which fluctuates between 0 and 100. Notwithstanding movements of the indicator are between 0 and 100, the movement above 60 rarely occurs. The value below 20 gives signal of weak trend and the value above 40 give signal of strong trend. ADX can be used for determination of potential changes in market. When readings cross 20 upwards it may give the signal of change in trend. When the indicator shows the value below 40 falling from higher level, it may mean that the trend loses its power.

Average True Range is an indicator of volatility. The true range is determined as the maximum of 3 values.
  • Difference between the current maximum and current minimum
  • Absolute value of difference of the current maximum and the previous closing
  • Absolute value of difference of the current minimum and the previous closing

If a range of fluctuations inside a period (difference between maximum and minimum) is relatively huge then the value of index will be calculated on the basis of it. If the difference between the maximum and minimum is relatively small then other two of above-mentioned methods will be used for the index calculation. The last two variants is usually obtained if the previous closing is more than the current maximum or the previous closing is lower than the current minimum.

Commodity Channel Index ( CCI). CCI was primarily created as an indicator for determination of reversal points in commodity markets. However, with the course of time it has become popular in stock markets and FOREX. The assumption which the indicator is based on is that all the assets move under influences of certain cycles and highs and lows appear at a certain interval. CCI belongs to the oscillators that measure speed of price developments.

Rate of Change (ROC) is one of the simplest and most effective oscillators that show percentage change in prices from one period to another. ROC is calculated as comparison between the current price and the price of previous period lagged from the current one for N periods. Periods refer to the intervals from 1 minute to 1 month.

Relative Strength Index is another most popular oscillator estimating movement power. RSI compares value of rises of asset price for the last time with value of its fall and provides the information in terms of numbers between 0 and 100. The only parameter of RSI is time frame used in calculation.

Stochastic Oscillator is an indicator that shows ratio of the current closing price to high/low for the specified period. It is created to use one of characteristics of market prices – when there is uptrend, closing prices are usually close to the high boundary of trading range and in downward direction closing prices are usually close to the low boundary of trading range for the specified period. Stochastic Oscillator measures location of closing prices of the last period relative to the high or low boundary of price change for the specified time frame.

Momentum shows speed of price changes or, in other words, rate of price changes, being, at the same time, one of the simplest and most effective tools of technical analysis. If the current closing price exceeds the previous one it shows upward trend, but if the current closing price is lower than previous it means downward trend. Sometimes smoothed momentum is used in order to reduce volatility. For this purpose Moving Average is used. In most cases, the indicator is anticipatory with regard to the main price movement.

Ichimoku was created in Japan for analysis in concert with candlesticks because when using candlesticks alone there was impossibility to accurately determine entry and exit points as well as stops and limits. Icsahimoku was developed by Goichi Hosoda (under the pseudonym of Ichimoku Sanjin) for Nikkei index. It is considered to be a trend indicator as it gives good signals in a trend and range.