Technical Indicators are mathematical calculations that are based on the historic price, volume, or open interest of a security to forecast the trajectory of the financial market or price behavior.
Technical Indicators are basic but essential parts of technical analysis. These indicators are used to predict future market movements and price behavior. These help the trader get into the flow of the market and to learn many basic concepts in trading.
Types of Indicators
The three general types of Forex technical indicators are:
Trend-following indicators – these types of indicators determine the overall trend of a currency pair. Trend indicators change the value on the basis of the strength of the underlying trend (either uptrend or downtrend). The following are trend-following indicators:
- MACD (Moving Average Convergence Divergence)
To trade with MACD,
- Cover and buy when the MACD1 (fast) crosses MACD2 (slow) from below.
- Cover and sell when the MACD1 (fast) crosses MACD2 (slow) from above.
- Parabolic SAR
To trade with Parabolic SAR,
- Cover and take a long position when the closing price crosses ParSAR from below.
- Cover and take a short position when the closing price crosses ParSAR from above.
- ADX (Average Directional Movement Index)
Momentum indicators – these indicators follow the speed of price behavior or change within a certain period of time. These indicators are efficient whenever a breakout happens as they aim to catch the primary price to move with high momentum. The following are momentum indicators:
- Relative Strength Index (RSI)
To trade with RSI,
- Cover and take a long position when RSI crosses above 30.
- Cover and take a short position when RSI crosses below 70.
- Stochastic Oscillator
To trade with Stochastic Oscillator,
- Cover and buy when the Stoch % crosses above 20.
- Cover and sell when the Stoch % crosses below 80.
- Commodity Channel Index (CCI)
Volatility indicators – these indicators evaluate the price volatility of the market. The faster the price rises or falls, the more volatile the market is. If the price moves relatively slowly, it means the market is non-volatile. The following are volatility indicators:
- Bollinger Bands
To trade with Bollinger Bands,
- Cover and buy when the closing price crosses the lower band from above.
- Cover and sell when the closing price crosses the lower band from below.
- ATR (Average True Range)
Using Forex Technical Indicators
There are two general groups of indicators that appear on the chart. The first one are indicators that are directly applied to the price chart while the second one are indicators that appear in a separate indicator window right below the price chart.
Once an indicator is applied on the chart or the indicator window, you can change its properties in the Indicator Settings. For MetaTrader4, right click on the indicator and click Properties from the drop-down menu. An example is given below:
You can experiment in the settings of the indicator to see its behavioral changes. This is also a way for you to determine which indicator and which set up works with your trading strategies.