Fortunately, it isn’t necessary to know exactly how to calculate them in order to use them. Software will do that for you. But, it’s helpful to have some idea of how they are arrived at, and what they mean, in order to evaluate their worth as trading tools.

Keep in mind, however, that none of the indicators – taken alone – tell the whole story. Nor do all of them together make one certain. Indicators are just that, they indicate. They do not predict with certainty. No mathematical tool used in Forex trading will do that. Beware of hyped promises.

Following are some of the more commonly used.

-  Moving Average

Just as prices can be charted so can average prices. And, like the prices themselves, the averages change over time. The two most commonly calculated are the SMA (Simple Moving Average) and EMA (Exponential Moving Average).

The SMA is the average of prices taken at specified intervals, say an hour or a day. Each price is weighted equally in calculating the average. The more complicated EMA weights some prices more than others, on the premise that some are more relevant. Recent prices are considered more telling than those further back, hence these are weighted more in the calculation. For example, a 10-day EMA calculation will weight the last days more heavily than the first days.

Many software tools will indicate a buy signal when the current price rises above its moving average, since this suggests a rising market. A sell signal may be triggered when the price falls below the moving average.

- Bollinger Bands

Just as in futures and options trading, Bollinger Bands are a commonly used indicator. While their calculation involves some heavy-duty mathematics, their interpretation is considerably easier.

The bands are calculated as standard deviations above and below a simple moving average. The width of the bands will vary depending on volatility. As volatility rises, they become wider. As volatility decreases they narrow. Prices tend to stay within the upper and lower bands, with sharp price changes tending to occur after the bands tighten. If prices move outside the bands, the current trend will tend to continue.

A sell signal is suggested when the current price is above the moving average, close to the upper band. A buy signal is indicated when it moves to the lower band.

- RSI

The RSI, or Relative Strength Index, is a value between 0 and 100. A number above 70 usually suggests that a currency is overbought and therefore due for a price reversal. A value below 30 indicates a currency is oversold.

As a price is making a new high, but the RSI fails to surpass its previous high, the trend is said to ‘diverge’. This often indicates an impending reversal of the trend. When the RSI dips below a recent bottom, it is said to have executed a ‘failure swing’. That move is seen as tending to confirm the impending price reversal.
There are several other common indicators, including MACD (Moving Average Convergence/Divergence), Momentum, OBV (On Balance Volume), Money Flow Index, Parabolic SAR, Stochastic Oscillators and dozens even more esoteric.

All these were developed as statistical tools to help predict prices and trends. But keep in mind that, though some technical analysts claim to eschew looking for causes, all of them are based on assumptions when used as technical indicators.

As with any tool, they should form part of a strategy for trading. They should not be used as a substitute for studying the market and using proper risk management.

Post from: Finance Market Investment

Technical Indicators in Forex Trading

Fortunately, many of the more or less standard indicators and charts used in stock, mutual fund or bond trading are used in Forex with minor adaptations. Buying and selling still involves monitoring prices and observing trends. That means that many of the statistical analyses used to do that are the same, regardless of the trading instrument being measured.

As with stock or bond trading, the simple line graph is still an enormously popular tool – popular because it is so helpful. In a simple form, current prices and the historical trend can be seen at a glance. The wrinkle in Forex trading is this: what do you mean by ‘the’ price?

Forex prices are always quoted for a pair of currencies. EUR/USD quoted at 1.2537/40 means that for $1.2540 you can buy one euro. To sell euros you own in exchange for dollars, you would receive 1.2537 dollars per euro.

Charts of these prices as they change over time are generated by calculations based on tools from technical analysis. Technical analysis involves the use of highly sophisticated statistical techniques to measure, calculate and predict likely price movements and directions.

A simple technical tool might be an average calculated over time. Note the price right now. Note it again an hour later. Repeat for 24 hours and average those numbers. All this, and much more, is typically done by software available from a wide variety of Forex brokers and online sites. That average represents ‘the price’ over an average trading day.

That one day average could be used as a single point on a line graph. Repeat the process at the same times for 30 days, plotting each point, and eventually you’ll build up a line graph of a 30-day moving average. The average itself will change over time, just as the price does. The change in that average over a 30-day period (or any other interval) gives an investor one insight into price changes.

In Forex trading, there are a dozen common calculations and charts. Some take two moving averages for different intervals – say, minute-by-minute measurements averaged over one hour compared to hour-by-hour averaged over 24 hours – and plots both on one graph. A number called the Moving Average Convergence/Divergence can then be used to compare those moving averages.

Fortunately, the average trader doesn’t have to understand the underlying mathematics in order to take advantage of these tools. Software, some downloadable to your desktop, others that operate directly within your browser, can be used to generate the charts. Some provide technical indicators, buy/sell signals and other useful information.

Still, understanding how to interpret these charts requires time and practice.

Beyond the simple line graph there are a few common charts that every Forex trader will want to learn how to use. Among these are the Bar Chart and the Candlestick Chart.

A bar chart displays prices in the form of a vertical ‘tick’ or bar, with small horizontal lines to the right and left. The ends of the bar indicate the high and low for some period, often the prior 24 hours. The left-facing tick is the opening price for that period, while the closing price is indicated by the right-facing tick.

A series of these bars can be graphed to form a bar chart for any time interval desired – daily, weekly, monthly, yearly and so on. Nor does the time period have to be opening and closing prices over a 24 hour period. They could just as easily be prices every hour, graphed over a day, a week and so on.

Candlestick charts are similar to bar charts, but contain additional useful information in graphic form. Originating in Japan, where they were used to track changes in agricultural futures contract prices, they have become part of the trading toolkit everywhere.

In addition to containing the information of a bar chart, they add color coding, by making the bar have a small width, hence its similarity in appearance to a candlestick.

The rectangle making up the ‘candlestick’ is called the body. A white (or, just as often, green) body indicates a closing price higher than the opening price. A black (or red) price indicates a closing price lower than the opening price. The lines protruding top and bottom from the body indicate the high and low prices at the tips.

Some candlesticks will have no line (or shadow as it is sometimes called) protruding from the top of body. That indicates that the currency closed at its high. Similarly, there may be no line protruding from the bottom. Such information is helpful in judging trends.

The length of the body, just as does the length of the bar in a bar chart, give a visual indication of the range of prices for that period. That is a visual measure of the volatility of prices, a very important factor in trading.

Candlesticks will form patterns as they are charted over time. Those patterns aid investors in making trading decisions. Those patterns have colorful names, such as the Hammer, the Hanging Man, the Morning Star and others. But though the names are fanciful, the purpose is serious: to help detect and predict trends.

Various patterns suggest trends that can be used as part of a trading strategy. Interpreting them, however, is part science, part art. The broker and software you select can help you understand them, provided you are willing to make the effort to study them over time.

Post from: Finance Market Investment

Line Graphs, Bar and Candlestick Charts

Forex signals are buy and sell indicators based on technical analysis. Technical analysis uses historical price and volume data to statistically analyze trends. The goal is to establish, with a stated probability, the likelihood of future price movements.

A signal could be as simple as ‘Buy euros now at 1.1901′. Those signals are delivered in any number of ways, by email, SMS text message to a cell phone, IM message and so on. Some are no more than flashing text and/or icons on trading software. The software contains in-built algorithms that use the methods of technical analysis, combines it with current market data and generates a signal.

For example, one commonly used technical indicator is something called MACD (Moving Average Convergence/Divergence). Without going into details here, it uses the moving average – the change in an average price over time. A signal can be generated when the value of MACD crosses above (or below) a certain threshold. Buy when it moves above the line, sell when it falls below.

Some signal services allow clients to automate the process of Forex trading even further. You can leave standing orders that when a certain signal is generated, carry out the recommendation. You get an email recommending ‘Buy euros now at 1.1901′ and the broker automatically enters an order to do just that.

As with any trading tool, it has to be used intelligently in order to avoid disasters. Entirely automating your buys and sells can amount to automatically losing money. Using a signal service can make your life easier, but never abandon your investments entirely to an automated service.

If you plan to do that, you may as well simply turn your investments over to a broker with the instruction: ‘Maximize my returns, but keep the risk down to a reasonable level’. Sensible, but not helpful if you want to control your destiny.

Signal services are definitely useful, however. They can relieve investors of the need to continually monitor prices. They can simplify the sometimes bewildering complexity of charts. They can help the investor make better decisions about when to buy or sell and at what price.

All that comes at a price, of course. Signal services range from $50-$250 per month, though some are cheaper and a few are more. Only the individual investor can decide whether the cost is justified. As with any trading service, if you make more than it costs than you would without it, that’s profitable.

But, buyer beware. There are dozens of firms that will be happy to take your money. Whether their analysis, and therefore, their signals, are worth anything is a learning experience all its own.

At minimum, investors should use order types that help control risk. Stop-loss orders, limit orders and other common types are an essential means of limiting losses and timing buy and sell orders. That technique, commonly employed in stock trading, is even more critical in the volatile world of Forex.

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Using Forex Signals as a Trading Tool