In earlier articles on forex trading we learnt about the relevance of technical analysis and how it is to be used judiciously in conjunction with fundamental analysis. Specifically we also analyzed the intricacies of technical indicators such as MACD, Bollinger Bands, and Elliot Waves and so on. But this does not constitute the whole picture of technical analysis. There are some other exotic technical indicators you should be aware of and know how they play off in forex trading.
Just as any other technical indicator this involves the plotting of a series of data points which could effectively predict currency movements. In simple terms, RSI measures the ratio of up-moves to down-moves and then expresses it as an index which is usually in the range of 0 to 100. If the RSI is 70 or greater, then the currency is labeled as being in an overbought situation. What this means is that, currency prices have increased more than market expectations. If the RSI is 30 or less, then the currency is labeled as being in an oversold situation. What this means is that, the prices had fallen more than the market expectations. In other words RSI indicates the peak and low prices over a specific time interval.
It was developed by George C Lane in the 1950s essentially as a technical indicator of the momentum variety. It helps to indicate overbought and oversold situations on a scale of 0 to 100%. As you can see from the diagram below, a stochastic indicator consists of two lines %K and %D. The %D line appears dotted in the diagram.
A stochastic value below 20 means that a currency is oversold; whereas stochastic value over 80 means that a currency is in an overbought situation. In other words, a stochastic oscillator indicates the strength or weakness of a given market. How does it do that? It does so by comparing a given ending price to a price range over a specific time interval.
There is no simplistic explanation for Gann numbers, but it basically charts a relationship between price movements and time. Although it is increasingly used in stock trading, there is every chance you could find a reference to it in forex trading too. As you can see from the chart below, Gann numbers are calculated by using angles in charts. This helps in determining the support and resistance areas and could be used to predict the timing of future trend changes.
This indicator is used to demonstrate if a market were entering an upward or downward trend and if so, tells you the strength of that given trend. For this indicator, a value above 25 indicates a trend with a greater strength than usual.
Whenever you come across any elucidation on technical analysis, chances are you may come across the words “trend” and “moving average”. So you need to know what these words mean. You also need to have a basic understanding of the different varieties of charts used in technical analysis. For the present we will discuss these issues at a very basic level
Generally rising peaks and troughs constitute an uptrend. Similarly falling peaks and troughs constitute a downtrend. Therefore, a trend simply refers to the direction of prices. If a trend line is broken it signals a reversal of trend.
It is the average price over a specific time period, when that price is compared to other average prices during the same period. For example, what would be the moving average of ending prices over a 10-day period? It would simply be the total of the ten ending prices divided by 10. Then there is the “simple moving average”, wherein the price is averaged over a number of days. Every successive day, the oldest price is excluded from the average to be replaced by the current price. So you could say that the average keeps moving daily. Moving averages are used to iron out the rough edges from price information. This helps to authenticate and confirm trends and also support and resistance levels.
Firstly what is it that constitutes a price chart? In simple terms a price chart contains information about forex prices at specific time intervals. These intervals could be anywhere between one minute to several months.
Prices could be displayed in the form of line graph, bar graph or candlestick graph. One of the advantages of line graphs is that they are easy to understand and they are useful to find patterns over long periods of time.
Bar graphs can provide a greater amount of information than line graphs. For example a longer bar would better indicate a bigger separation between high and low prices.
Candlestick charts originated in Japan and they are usually color coded. These charts indicate prices at the beginning and end of a certain time interval as well as the peak and low prices over that interval. Green candlesticks are associated with increasing prices, while red candlesticks demonstrate decreasing prices.
In actual practice the world of technical indicators is increasing by the day. On Balance Volume and Parabolic SAR are some of the other technical indicators being extensively used in forex trading, but a discussion on these indicators is beyond the ambit of this article. As a beginner it would be enough if you knew the basics of the popular indicators we discussed above.