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Forex Indicators

At present, there is a large number of Forex indicators. In addition to the existing technical indicators, traders have an opportunity to create their own ones. It will be more reasonable to look through the main technical indicators.

Moving Average (MA) is the simplest and most popular indicator in technical analysis. MA belongs to a class of trend indicators and helps to identify the beginning and end of a trend. The slope and angle of MA show the trend direction and strength. MA is used as a base parameter or smoothing factor in other technical indicators.

Weighted Moving Average (WMA) is a slight variation from the simple MA. WMA presents the arithmetic weighted fluctuations of price for a certain period. WMA is more reliable than the simple MA. There are many different types of WMA based on different methods of weight calculation. In general, MAs smooth past price data and identify trends. It is very important especially on the volatile markets.

Forex traders very often use Exponential Moving Average (EMA) for carrying out a more accurate analysis. EMA takes into account the distance between prices and gives more weight to the recent prices; therefore, EMA is more sensitive to the price changes than the simple MA. Weight value of the recent prices depends on the period of EMA. The shorter period of EMA, the more weight is applied to the most recent prices.

Moving Average Envelopes (MAE) are formed with two MAs: one of which is shifted upwards and another is shifted downwards to a certain percentage called envelope coefficient. Sometimes the third line is drawn from which shifting is made. Envelope is used to determine the boundaries of price fluctuations for a currency pair. The main principle of envelopes use is that after a few fluctuations, the price always returns to the central MA.

Bollinger Bands indicate the current market volatility. It is similar to MAE. However, unlike MAE, the changes of Bollinger Bands depend not only on the direction of the price movement, but also on the type of this movement. Bollinger Bands allow estimating how far short-term movement has moved away from the main trend.

Average Directional Index (ADX) is a technical indicator used for trend strength estimation. ADX indicates whether the trend becomes stronger or weaker. Index presents a single line with values ranging from 0 to 100. Values above 60 are rare values. If the value is equal or below 20, it means that the trend is weak. If the value is equal or above 40, it means that the trend is strong. ADX also defines changes on the market. Value rising from below 20 to above 20 implies that the trend positions are strong and trend may be changed. Value falling from above 40 to below 40 implies that the trend is weakening.

Average True Range (ATR) is a Forex indicator used to measure volatility. ATR is determined as the difference between the current maximum and the current minimum, absolute value of difference of the current maximum and the previous closing, absolute value of the current minimum and the previous closing.

If the fluctuations inside a period (difference between maximum and minimum) are significant, then the index value is calculated based on the fluctuations range. If the fluctuations range is small, the index value is calculated on basis of the absolute difference between the current maximum (minimum) and the previous closing. The previous closing should be higher than the current maximum or lower than the current minimum.

Commodity Channel Index (CCI) helps to determine the reversal points on the commodity market. The index is very popular with the traders on the Forex market as well as on the stock market. The assumption behind CCI is that assets flow in cycles with maximums and minimums occurring at regular intervals. CCI is the oscillator measuring speed of price fluctuations.

Rate of Change (ROC) is the oscillator indicating the percentage change in prices from one period to the next period. ROC is very popular with the Forex traders due to its simplicity. ROC compares the current price with that of the previous period. Period refers to various time intervals.

Relative Strength Index (RSI) is a technical indicator used to determine the speed of price movements. RSI measures price upwards and downwards movements. Index oscillates between 0 and 100. The only Index parameter is a time frame.

Stochastic Oscillator (SO) is the oscillator comparing the current closing price with maximum (minimum) for a certain period. The assumption behind SO is that in the uptrend the closing price is close to the upper boundary of the trading range and in the downtrend the closing price is close to the lower boundary of the trading range. SO measures the closing price of the last period in relation to the upper or lower boundary of the trading range for a certain period.

Momentum is one of the simplest and most efficient tools of technical analysis indicating the speed of price fluctuations. In the uptrend, the current closing prices are higher than the previous closing prices. In the downtrend, the current closing prices are lower than the previous closing prices. Smoothed Momentum is used to reduce volatility. MA is used for this purpose. In the majority of cases indicator anticipates the main price movement.

Ichimoku is an indicator developed by the Japanese analyst Goichi Hosoda for Nikkei Index. Ichimoku is used with candlestick analysis since candlesticks alone do not identify accurately entry and exit points, limits, and stop orders. The indicator is considered to be a trend indicator, as it gives good trend signals.