Forex Trading Indicators

The following post is a glossary of forex trading indicators.  So ofter we hear abbreviations and these can be misleading as so many abbreviations can stand for so many different things.

Price Action

Price action is the movement of a security's price plotted over time. Price action forms the basis for all technical analysis of a stock, commodity or other asset charts. Many short-term traders rely exclusively on price action and the formations and trends extrapolated from it to make trading decisions.

 

Price action describes the characteristics of a security's price movements.  In simple terms, price action is a trading technique that allows a trader to read the market and make subjective trading decisions based on the recent and actual price movements, rather than relying solely on technical indicators

In simple terms, price action is a trading technique that allows a trader to read the market and make subjective trading decisions based on the recent and actual price movements, rather than relying solely on technical indicators.

Trading Indicators

Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis. … Examples of common technical indicators include the Relative Strength Index, Money Flow Index, Stochastic, MACD and Dillinger Bands

 

A heuristic technique, or a heuristic for short, is an approach to problem solving or self-discovery that employs a practical method that is not guaranteed to be optimal, perfect or rational, but which is nevertheless sufficient for reaching an immediate, short-term goal.

Indicators are the cornerstones of technical analysis and play an important role in giving and confirming entry and exit signals in stock trading systems.

Leading Indicators are indicators that lead to price movement. In other words, they indicate the probability of a trend reversal in advance.

Exponential Moving Average or EMA

A moving average is a technical analysis indicator. The EMA indicator is very popular in forex trading. The indicator was developed to counter the lagging weakness of the SMA indicator by weighting more recent prices more heavily. Its origins are unknown, but its use was designed to smooth out the effects of price volatility and create a clearer picture of changing price trends 

Simple Moving Average or SMA

The SMA is a technical indicator for determining if an asset price will continue or reverse a bull or bear trend. The SMA is calculated as the arithmetic average of an asset's price over some period. The SMA can be enhanced as an exponential moving average (EMA) that more heavily weights recent price action.

The moving average is calculated by adding a stock's prices over a certain period and dividing the sum by the total number of periods. For example, a trader wants to calculate the SMA for stock ABC by looking at the high of the day over five periods.

 


SMA and EMA are calculated differently. The calculation makes the EMA quicker to react to price changes and the SMA react slower. That is the main difference between the two. … Many shorter-term traders use EMAs because they want to be alerted as soon as the price is moving the other way

Hull Moving Average or HMA


Of all the moving averages the SMA lags price the most. The Exponential and Weighted Moving Averages were developed to address this lag by placing more emphasis on more recent data. The Hull Moving Average (HMA), developed by Alan Hull, is an extremely fast and smooth moving average.

Popular Momentum Indicators

Moving Average Convergence Divergence (MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA

Relative Strenght Index or RSI

The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100

Volatility indicators are technical indicators. … Volatility indicators are a special form of technical indicators. They measure how far an asset strays from its mean directional value. This might sound complicated but it simple: When an asset has high volatility, it strays far from its average direction.

 

An oscillator is a technical analysis tool. A technical analyst bands an oscillator between two extreme values and then builds a trend indicator with the results. The analysts then use the trend indicator to discover short-term overbought or oversold conditions.

 

The SMA is a technical indicator for determining if an asset price will continue or reverse a bull or bear trend. The SMA is calculated as the arithmetic average of an asset's price over some period. The SMA can be enhanced as an exponential moving average (EMA) that more heavily weights recent price action.

Rate of Change or ROC

ROC – indicator for MetaTrader 4 is a Metatrader 4 (MT4) indicator and the essence of the forex indicator is to transform the accumulated history data. ROC – indicator for MetaTrader 4 provides for an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye.

 

Commodity Channel Index or CCI

The commodity channel index is an oscillator originally introduced by Donald Lambert in 1980. Since its introduction, the indicator has grown in popularity and is now a very common tool for traders in identifying cyclical trends not only in commodities but also equities and currencies

What are the best leading indicators?

The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. … The RSI is most typically used on a 14-day time frame, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. 

 Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA

Parabolic Stop and Reverse (SAR)

parabolic SAR (parabolic stop and reverse) is a method devised by J. Welles Wilder, Jr., to find potential reversals in the market price direction of traded goods such as securities or currency exchanges such as forex. Stochastic.

Stochastic refers to a randomly determined process. The word first appeared in English to describe a mathematical object called a stochastic process, but now in mathematics, the terms stochastic process and random process are considered interchangeable.

Average Directional Index (ADX)

The average directional index (ADX) is a technical analysis indicator used by some traders to determine the strength of a trend. The trend can be either up or down, and this is shown by two accompanying indicators, the Negative Directional Indicator (-DI) and the Positive Directional Indicator (+DI)

Ichimoku Cloud.

The Ichimoku Cloud is a collection of technical indicators that show support and resistance levels, as well as momentum and trend direction. It does this by taking multiple averages and plotting them on the chart

Dillinger Bands.

Dillinger Bands is a technical analysis tool developed by John Dillinger. There are three lines that compose Dillinger Bands: A simple moving average (middle band) and an upper and lower band. The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average but can be modified

 

Whether you are a fundamental trader or a technical trader I hope that the information above helps to explain the different indicators available so that you can decide what type of trading you wish to follow.

Please comment or leave a question and I will do my best to answer

 

What is forex trading

Mission statement

‘To bring educational resources and personal experience to traders and Investors alike.  To save you time and improve your financial performance'

As promised from my previous post, I will be concentrating this post on Forex Trading.

Woman trading currencies online on forex trading platform.

I would like to commence with a look at the history of the forex market. Approximately 500 years ago the forex market was first established in Amsterdam.

  • Money was in the shape of metal objects.
  • Jump forward to the year 1875 when the Gold standard was introduced. Jump forward again to 1970s and before the internet.

If you were an investor wishing to trade the forex market you had to call a brokerage firm. You had to rely on the broker accepting a phone call as and when the trader wanted to trade. Voice brokerage trading still exists but the majority of forex trading is carried out online. So ‘What is forex trading online about'?

Forex, also known as foreign exchange or FX trading is conducted over the ‘interbank market', which is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly or through electronic brokering platforms

New-York-Stock-Exchange

Forex is one of the largest trading markets, with a global daily turnover estimated to exceed $5 trillion US dollars and approximately equivalentto£4.2 trillion GB sterling.

Traders who work with pairs based on the dollar will find the most volume in the US trading session. However, the London stock exchange is the largest of all the stock exchanges. The forex market opens on Sunday evening 2100 GMT and closes on Friday at 2100 GMT.

There are three sessions

1 European markets

2 United States markets

3 Asian markets

The sessions are broken down as follows.

The London Stock Exchange commences at 0800-1700 hrs overlapping with the New York Stock Exchange 1300 pm to 2100 pm GMT,

Australia 2200 – 0600 GMT

and Japan 2300-0700 GMT.

Time frames on forex exchange platforms allow the trader 1 minute, 5 minutes, 15 minutes, 1 hour, 4 hourly, daily, weekly and monthly periods to trade depending on their trading plan and their trading strategy. Forex traders will record their trades in their trading journal.

Currency Pairs

All currency trading is done in pairs. You have to buy one currency and sell another currency. Here are the 3 groups of pairs,

  1. Major pairs: These pairs include AUD/USD, EUR/USD, GBP/USD, NZD/USD, USD/CAD, USD/CHF and USD/JPY
  2. Minor pairs of currency pairs that do not include the US dollar IE EUR/JPY
  3. Exotic pairs of currency pairs of the developing countries.

    Forex trading

There are people trading from all walks of life. Until recently the volume came from professional traders, from large companies but as currency trading platforms have improved more retail traders have found forex to be suitable for their investment goals.

Part-time traders are operating out of different rooms of their homes quite often after a day’s work, something that only became possible with the proliferation of the internet.

 

One of the reasons Forex trading is so popular with hobbyist investors is that the markets are open pretty much 24 hours a day, following the different countries’ time zones allowing people from all over the globe to be trading at some time or another.

There are accumulations of these part-time forex traders losing money day after day, they are largely self-taught.

It’s essential that would-be traders don’t invest money they can’t afford to lose as forex trading without an understanding of risk management and position sizing is fraught with risk.

New entrants to the market face a bewildering array of options, platforms and terminology not to mention whether they study fundamental trading or technical trading.

Risk Management

Risk management is essential to help protect a trader from losing all of his or her money in their forex account. This can be put in place by position sizing, setting stop losses and take profit levels to remove profits from the trade safely back into the account.

Position sizing

Position size should be considered before entering into a trade. This will depend on the account size. Should the position size be too large the trader is putting their account into too much risk. When the position size is too small the trader will grow their account more slowly.

In forex trading, the position size is measured in pips and lots.

Lot Sizes

1 A micro lot is 1,000 units of currency;

2 A mini lot is 10,000 units; and

3 A standard lot is 100,000 units you buy or sell in a trade.

Most professional traders risk 1% or less of their account. A pip, which is short for “percentage in point” is normally the smallest part of a currency price that changes.

Stop losses.

A stop-loss closes out a trade if it loses a certain amount of money. It is how you make sure your loss does not exceed the account risk loss.

Its location is also based on the pip risk for the trade. However, in a volatile market, there are times when you can be whip lashed out of a trade and lose more than you had planned for.

This can quite often happen following a news flash that may affect the market you are trading in.

Take profits

There are several ways to decide where to place your take profit position. One way to take profit in a successful trade is to put an order in to close a position when the next support or resistance level is reached.

support-and-resistance-levels

We will discuss support and resistance levels in a later post.

Another common and an extremely simple way to take profit is to simply close the trade at the end of the day, known as day trading. Sometimes I have woken to a nice profit when trading goes into the Asian market, however, sometimes I wake to find the profits I had, disappeared when the trade peaked and changed direction.

Alternatively, you may wish to set your take profit by taking your stop loss size and setting your take profit at 2 times risk. In long term trading, this could increase to 3 times or 4 times risk, this is possible in weekly or monthly trading.

Preparation comes before Action

This post has looked at the history of the forex market. It has discussed the opening of the markets, the sessions available to trade. It has described the different trading times on a forex platform. Currency pairs and risk management have also been described.

The purpose of this post was to look at the question So ‘What is forex trading online about'?

I have introduced you to just some terminology a trader will need to study and inwardly digest before signing up to a forex trading platform or risk your hard-earned savings. There is so much more to discuss and in greater depth.

Subsequent writing will break down the information required before any potential trader should consider entering into a forex trading environment.

If you wish any further topics covered within forex trading please leave a comment below

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