Forex indicators :


Indicators are a major part of technical analysis. So far, we have largely studied configurations necessarily taking into account the courses themselves. Conversely, in this forex course we will present tools whose study does not force us to watch the course developments.

Momentum or trend tracking indicators

In general, two types of indicators can be distinguished. First, there are the so-called "momentum" or "trend tracking" indicators. These forex indicators have the peculiarity of giving you signals that will be overdue. More clearly, the courses will initiate a movement and then the indicator will give you a signal.
In contrast, there are indicators known as "oscillators", these indicators are known to give signals in advance, that is to say before the courts begin the movement.

Why do we use indicators that give overdue signals while others give them in advance?

Difference between oscillators and trend tracking indicators
With the experiment one soon realizes that the oscillators give many false signals. However, once the signal is valid, you will have to make a big gain. Unlike that trend tracking indicators will give you fewer false signals, however the gains will be less as the courses will already have announced the trend before the signal appears.
We will study these different types of indicators in detail.

The oscillators

Above all, it is necessary to understand what these indicators generally want to show. You have to know that through the incoherent movements that the graphs expose us, there are two types of configurations that may interest us. The first is that of the trend, that is to say that the courses are clearly oriented in one direction, for this purpose, indicators of trend follow-up are used. The second is that which one could call cyclical, ie the prices move overall in range without clear trend. In this type of situation the oscillators will give you optimal signals.

The basic principle of oscillators is to consider that there is an equilibrium point on the prices. When the prices move too far from this point they retrace to return to this balance. An oscillator is a bounded indicator (evolving between two thresholds) and one can define so-called overbought or oversold zones of its own. The overbought zone corresponds to the area where the prices are considered too high, vice versa for the oversold zone.

Here is the example of an oscillator that is the RSI (Relative Strength Index)

 As you can see, it is bounded by 0 and 100 (so it can not go beyond), the overbought zone is above 70 and the overbought zone is under 30. This indicator shows us fairly simply the characteristics of An oscillator.

In order to illustrate the usefulness of an oscillator we will see an application example through the RSI.
First and foremost, we identify an area devoid of clear trend, so in a range situation, in this case the use of oscillators remains very relevant. The green and red arrows represent respectively the entry of the courses in area of overbought and oversold. At this moment it is considered that the prices are too far from their equilibrium, and consequently a more or less severe correction is to be made. On the other hand, we see here that after returning to these areas the courts have corrected.

Trend monitoring indicators

These indicators are used unlike oscillators in phases of clear trends. There is little point in relying on such indicators in market conditions. Indeed, it is first necessary to understand the purpose of these indicators. Logically, they are generally used to filter out noise on the courts to make a clear move. It is customary to pair them with another filter in order to obtain an input signal.

The best-known trend-tracking indicator is the moving average (also known as a rolling average in statistics). This indicator applies directly to prices and allows, depending on the period, to know the background movement of the market.

Study of two moving averages (trend monitoring indicators)
 Let's study this example, here is plotted an arithmetic moving average at 50 days (blue) and another at 20 days (red). On the other hand, there is a rather large upward movement punctuated by several phases of corrections. There are several methods to filter a movement, here we will consider the crossing of the two moving averages. At the level of the green arrow, the MMS20 crossed the MMS50 upwards giving us a bullish signal. Then with the red arrow, it crosses downwards giving us a bearish signal. You will notice and as we said earlier, the signals are clearly late. The longer the period, the longer the delay will be, the more the movement will be filtered. In short, it is necessary to choose between a long delay and a good quality or with a large number of signals of less good qualities.

How to use different indicators to trade Forex?

At the conclusion of this course, we can essentially retain that there is no dominant type of indicator. The oscillators are very different from trend tracking indicators, they each have their strengths and weaknesses. Consequently, we can compare oscillators with each other, but it is useless to compare them with momentum indicators, it would mean comparing the Chartist figures with the retracements of Fibonacci. In the next courses we will see in detail the main technical indicators.
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