Indicators In Forex Technical Analysis

The underlying principle of technical analysis is that historical price predicts future price action. Since, forex market operates 24 hours a day, there tends to be a large amount of data that can be used to gauge future price activity, thereby increasing the statistical significance of the forecast. This makes it the perfect market for traders that use technical tools like technical analysis indicators.

Technical analysis indicators in forex are mathematical representations of market patterns and behavior. These indicators are calculations based on the price and the volume of a security. Technical indicators in currency trading measures money flow, trends, volatility and momentum. Forex indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities.

Technical analysis indicators in forex are also used to confirm price movement, quality of chart patterns and to form buy and sell signals. Let’s find out some of the primary indicators in forex technical analysis:

Accumulation or distribution technical indicator

Accumulation indicator is one of the most popular technical analysis indicators in currency trading. It is a price and volume indicator that measures money flow in a security. This indicator attempts to measures the ratio of buying to selling by comparing the price movement of a period to the volume of that period. It cumulatively tracks the volume, and displays the result as a single line with values above and below zero. This is a non-bounded indicator that simply keeps a running sum over the period of the security. Traders look for trends in this indicator to gain insight on the amount of purchasing compared to selling of a security. If a security has an accumulation line that is trending upward, it is a sign that there is more buying than selling.

Average Directional Index

Average directional index is another currency trading technical analysis indicator that measures the strength of a current trend. This indicator is used to identify the direction of the current trend and the momentum behind trends. Average directional index is calculated using the price, compares the current price with the previous price range, and displays the result as an upward movement line (+DI), and a downward movement line (-DI), between 0 and 100. Readings below 20 signal is a weak trend while reading above 40 signal is a strong trend.

Moving Average Convergence

Moving average convergence divergence (MACD) indicator is another well known and used technical analysis indicator in forex. It is comprised of two exponential moving averages, which helps to measure momentum in the security. This indicator charts the convergence and divergence of short term and long term moving averages. MACD shows graphically when the short term movements of price rise or fall faster than the longer moving average would suggest. This indicates the recent trend.

Relative Strength Index

Another important technical analysis indicator in currency trading is relative strength index. It is a momentum indicator that helps to signal overbought and oversold conditions in a security. Relative strength index is a trend following oscillator that ranges from 0 to 100. A reading above 70 suggests that a security is overbought, while a reading below 30 is suggests that it is oversold. With the help of this indicator you can identify whether a security’s price has been unreasonably pushed to current levels and whether a reversal may be on the way.

On Balance Volume

On balance volume is one of the other technical indicator in currency trading that reflects movements in volume. It is also one of the simplest volume indicators to compute and understand. On balance volume measures positive and negative money flow into currencies and acts as a leading indicator that may predict upcoming price changes.

Stochastic Oscillator

Stochastic oscillator is another important momentum indicator used in technical analysis. This indicator is used to indicate overbought and oversold conditions on a scale 0-100%. The idea behind this indicator is that during an uptrend, prices tend to close at the high of the trading range, and during a downtrend at the low of the trading range.

Go through the above articles on currency trading technical analysis indicators to gain more knowledge about forex maket.