A technical indicator is applied to a chart and uses three pieces of information – time, price and volume, to give you insight into where a pair is headed.
Because the forex is a distributed market, there is very little volume information. That leaves just price and time. There are a lot of ways to analyze that information and the potential variables are endless. Understanding how to wade through the swamp is vital. Technical indicators can help.
Types of technical indicators
Most technical indicators fall into two groups.
Oscillators, which include stochastics, MACD, CCI, RSI and many other popular indicators.
Moving average indicators which are usually overlaid directly on the price chart.
Hybrids and uniques don’t fall into either category but they are rare, and will be discussed in a later advanced course.
For the remainder of this section, we will discuss oscillators.
Is that you oscillating?
An oscillator is a technical indicator that moves up and down (oscillates) within a range. They are usually designed to show the current trend and help identify potential reversals.
There are many different oscillators, and all of them have their own strengths and weaknesses. We use the CCI and MACD indicators quite a bit at PFX, and we will use them as examples below.
Technical indicators have some great advantages and some big drawbacks. Their biggest advantage is that they simplify price movement and are very easy to build rules around. Most technical indicators have very clear breakout levels.
The disadvantage with technical indicators is that they lag price movement. By the time a breakout is identified on the indicator, the price move has already been in play for a while. Despite that, there are a few ways to use technical indicators that can be really helpful. We will discuss two specific ways in this section.
Forex Essentials Course - 21 lessons:
1. What is the forex2. Supply and Demand
3. How Trading Works - Interbank and the Forex
4. Choosing a Dealer
5. Forex Pairs - Characteristics and Qualities
6. Earning Interest in the Forex
7. Margin and Leverage
8. Short Term vs. Long Term Trading
9. Forex Futures vs. Spot Forex Accounts
10. Fundamental Analysis in the Forex
11. The Calendar and Economic News
12. Introduction to Charting and Technical Analysis
13. Support and Resistance
14. Fibonacci Analysis
15. Price Patterns
16. Continuation Patterns
17. Reversal Patterns
18. Technical Indicators
19. Portfolio management – Diversification
20. Portfolio Management - Position Sizing and Stop Losses
21. Introduction for Forex Options
