Learning indicators on forex

A moving average is one of the fundamental tools of technical analysis. The two most popular types are the simple moving average and the exponential moving average.

The simple moving average (SMA) is calculated by averaging market prices over a given period. For example, the twenty-day moving average would average price levels for the first twenty days of the market. On the following day, the SMA would include the twenty-first day of the market, omitting the first day. All SMA values are plotted on a chart, resulting in a significantly smoothed indicator of overall price behavior. The more periods are taken into account by the SMA, the less the SMA line will reflect minor fluctuations in market behavior, and the smoother the data will be.

The exponential moving average (EMA) is more complicated, but is calculated by taking the difference between the current price and the previous EMA. This value is multiplied by a set percentage (often dependent on the number of periods taken into account), and the resulting number is added to the previous EMA value. Unlike the SMA, the EMA doesn't eliminate any previous price levels from consideration when making its calculations, and as such is slightly more responsive at reflecting minor fluctuations in price behavior.

Moving averages are a simple way to see overall price behavior for an asset, and are also used as variables for a number of more complicated technical analysis
charts and tools.

MACD

Moving Average Convergence/Divergence, an indicator used in technical analysis that was invented in the 1960s as a means of showing the differences between both the fast and slow EMAs (Exponential Moving Average) of closing prices, although since 1986 the graph has been produced as a histogram.

The moving average as expressed by the MACD is essentially the average of a price over a certain set amount of time and the MACD enables easy demonstration of the relationship between two exponential examples of the moving average.

Generally, a fast EMA would be considered one within a time frame of twelve days, whereas a slow EMA would represent a twenty-six day period.

The formula: MACD=EMA[12] of price - EMA[26] of price with a signal line of EMA[9] then plotted over the top of this MACD result, allowing as a trigger point for interpretation of buy and sell signals.

Generally, it is considered that when the MACD falls below the signal line it can be regarded as bearish and may well indicate a time to sell, whereas when the MACD rises above the signal line indicating a bullish trend which may indicate an upward trend in price.

McClellan Oscillator

The McClellan Oscillator is a technical analysis indicator for determining the behavior of an overall market, rather than the behavior of a single asset. The Oscillator was developed by Sherman and Marian McClellan for use with the New York Stock Exchange.

The McClellan Oscillator is taken by first subtracting the advancing assets from the declining assets for the entire market to determine the net advances and declines for the market. Two moving averages are taken of this net market behavior, one for a thirty-nine day period and one for a nineteen-day period. The difference between these two moving averages, formed by subtracting the thirty-nine day average from the nineteen day average, forms the McClellan Oscillator.

When the McClellan Oscillator is positive, advances are dominant in the market. When the Oscillator is negative, declines are dominant. Traders take this as a signal of the overall momentum for a market. Additionally, signals in excess of 100 or -100 are signs that a market is either overbought or oversold, respectively. If the Oscillator moves from -100 or below into positive numbers, a buy signal is generated; if the Oscillator moves from 100 or above into negative numbers, a sell signal is generated.

Bollinger Bands

Bollinger Bands are a simple technical analysis tool developed by John Bollinger, and are used to measure the volatility of a market as well as to indicate relative price levels.

Bollinger Bands consist of three lines. The center line is calculated by taking a simple moving average of the price of an asset. Traders most commonly use a 20 or 21-day moving average when calculating the center line of a Bollinger Band. Once the center line is calculated, the upper and lower bands are drawn two standard deviations above or below the moving average. The standard deviation of a market price varies depending on the difference between high and low prices for a given trading day, which means that when an asset becomes more volatile, the Bollinger Band expands, whereas when an asset becomes less volatile, the Bollinger Band contracts. This gives traders an idea of an asset's volatility.

If prices fall outside of two standard deviations of the median price (meaning that, on a candlestick chart, they fall outside of the Bollinger Band), those prices have reached an extremely high or extremely low level for the asset at that time. This can be a signal that a breakout from the trend is imminent, or a warning that an asset is overbought or oversold. When such indicators occur during a period of low volatility, this can be a very strong indicator of a coming reversal in trend, giving traders a signal to take the appropriate action with respect to that asset.

Parabolic SAR

The parabolic SAR (short for Stop And Reverse) is a very complicated predictive algorithm designed to establish a trailing stop-loss level for asset markets that follow strong bullish or bearish trends. The algorithm was introduced by J. Welles Wilder, Jr. in his 1978 book, “New Concepts In Technical Training Systems.”

The parabolic SAR for any given day is calculated before that day's trading, incorporating the extreme high or low value of an asset from the previous day as well as a variable acceleration factor designed to make emerging trends more visible to the trader. A parabolic SAR graph takes the form of a series of points—ideally arranged in a parabola—either above or below the price line. When the SAR points cross below the price line, long positions should be closed; when the SAR points cross above the price line, short positions should be closed. Since the SAR point for a day is calculated in advance, this graph allows traders to set their stop-loss levels at the beginning of the day in order to capitalize immediately on probable trend reversals. This creates a stop-loss level highly responsive to large-scale shifts.

The parabolic SAR is effective only for markets with strong trends, which, according to Wilder, comprise only 30% of markets. In horizontal markets, or markets dominated by rapid yet irregular fluctuations, the SAR becomes much less accurate at finding useful stop-loss levels, and other predictive tools should be used.