An indicator is a mathematical calculation that can be applied to a security’s price and/or volume fields. The result is a value that is used to anticipate future changes in prices.
Relative Strength Indicator
The Relative strength indicator (RSI) shows whether a currency is overbought or oversold. Overbought indicates an upward market trend, since the financial operators are buying a currency in the hope of further rate increases. Sooner or later saturation will occur because the financial operators have already created a long position. They show restraint in making additional purchases and try to make a profit. The profits made can very quickly lead to a change in the trend or at least a consolidation.
Oversold indicates that the market is showing downward trend conditions, since the operators are selling a currency in the hope of further rate falls. Over time saturation will occur because the financial operators have created short positions with profits. This can rapidly change in the trend.
An RSI between 30 and 70 percent is considered neutral. Below 25 percent indicates an oversold market, over 75 percent indicates an overbought market.
Moving Averages
The moving average (MA) is another instrument used to study trends and generate market entry and exit signals. It is the arithmetic average of closing prices over a given period. The longer the period studied, the weaker the magnitude of the moving average curve.
Bollinger Bands
The technique involves overlaying three bands (lines) on top of an OHLC bar chart (or a candlestick chart) of the underlying security.
The central band is a simple arithmetic moving average of the daily closes using a trader-selected moving average index. The upper and lower bands are the running standard deviation above and below the central moving average. Since the standard deviation is a measure of volatility, the bands are self-adjusting, widening during volatile markets and contracting during calmer periods. Bollinger recommends 10 days for short-term trading, 20 days for intermediate-term trading, and 50 days for longer-term trading.
As with moving average envelopes, the basic interpretation of Bollinger bands is that prices tend to stay within the upper and lower band.
Stochastic
The Stochastic oscillator was popularized by George Lane. It is based on the observation that as prices increase, closing prices tend to be closer to the upper end of the price range. Conversely, in downtrends, the closing price tends to be near the lower end range. Two lines are used in the Stochastic process-the %D line and %K line. The %D line is the most important and is the one that provides the major signals.
A bearish divergence occurs when the D line is over 80 and forms two declining peaks while prices continue to move higher. A bullish divergence is present when the D line is under 20 and forms two rising bottoms while prices continue to move lower. Assuming all of these factors are in place, the actual buy or sell signal is triggered when the faster K line crosses the slower D line
Moving Average Convergence Divergence (MACD)
The MACD was developed by Gerald Appel. What makes this indicator so useful is that it combines oscillators indicator and moving average crossover approach. The faster line (called the MACD line) is the difference between two exponentially smoothed moving averages of closing prices (usually the 12 and 26 days or weeks). The slower line (called signal line) is usually a 9 period exponentially smoothed average of the MACD line.
The actual buy and sell signals are given when the two line cross. A crossing by the faster MACD line above the slower signal line is a buy signal. A crossing by the faster line below the slower is a sell signal.
Remember, do not base your judgment alone in a single technical indicator, they can be best use in combination with one another. Learn how to create forex or stock trading plan to have a better edge in the market.