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

An option is a contract conferring the right to its buyer to purchase an underlying asset at a fixed price (the ‘strike price’). The right – not the obligation. A futures contract, by contrast, obligates the buyer (the ‘long position’) to purchase and the seller (the ‘short position’) to deliver some asset by a set date.

That underlying asset, in either case, can be a commodity (such as wheat, oil, gold), shares of stock, or some more nebulous instrument such as an index. Since an index is just a number no physical delivery is possible, such trades are settled in cash.

Futures have value as a mechanism for trading risk, publishing prices, and (like options) taking speculative advantage of leverage.

A farmer may not know in April precisely how much wheat he can deliver. Insect damage, droughts and other kinds of crop failure are even today very much real supply problems. Similarly, he can’t predict in April exactly how much demand will exist in October. (In part, that depends on the supply.)

Selling a futures contract allows him to offload that risk to someone willing to bear it. He obtains a set price commitment today in exchange for a promise to deliver a good by a certain date in the future. On the other side of the contract, the buyer offers a promise today to accept delivery of the good in the future.

Neither knows with certainty what the market price will be on the expiration date of the contract, only what the market price is on the day it’s entered.

For the contract buyer, a future offers several values in exchange for accepting the obligation to take delivery of (and pay for) a set amount of goods at a pre-set price.

One major value is, as in the case of options, the use of leverage. While options require paying of a premium (usually around 5%-10% of the current market price), futures have no in-built cost (apart from a small commission).

The buyer is required, though, to put up a ‘good-faith’ deposit, also in the neighborhood of 5% of the total. But that margin deposit allows the trader to control 10-20 times the amount of good he would otherwise have to pay for. That ‘multiplied control’ is leverage.

[Note: Though it's called a 'margin', it's NOT the same as buying stocks 'on margin'. In the latter case, that is a form of borrowing - with the broker lending the trader the amount needed to purchase all the shares the trader then owns.]

As a practical matter, a very small percentage of futures contracts actually result in the buyer accepting delivery of, say, 1000 barrels of oil. While the behind-the-scenes mechanics are somewhat complicated, at expiration the goods are ultimately transferred to brokers who sell them to those who actually make use of them.

To the traders the exchange is simple, though. Any change in prices is reflected in the accounts of the trading partners at the end of each day’s trade. At some point the contract is either sold (the most frequent result) or expires.

Post from: Finance Market Investment

Risks and Advantages of Futures