Technical Indicators I: Introduction

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Technical indicators are statistics of past market data base on different mathematical calculations. Traders use technical indicators extensively in technical analysis to predict the continuance and the reversals in currency trends.

There are two major types of technical indicators: trend following indicators and oscillators.

Trend following indicators reflect the direction and the strength of the current trend. Traders may enter a position when the trend following indicators showing the current trend is in a strong momentum. The most common trend following indicators are: moving averages and bollinger bands.

Oscillators are indicators banded between two extreme values that reflect short-term overbought or oversold conditions. In general, as the value of the oscillator approaches the upper extreme, the currency is said to be in an overbought condition, and as it approaches the lower extreme, the currency is consider to be oversold. Traders may exit a long-trade when the oscillators showing the current price is in an overbought condition, or they can exit a short-trade when the oscillators approach the lower extreme. The most common oscillators are: Relative Strength Index (RSI), Moving Average Concergence Difference (MACD) and Stochastic.

Nowadays, most charting packages include the above common technical indicators. Traders can find a charting package and add their favorite indicators to their charts. Traders tend to use a mix of trend following indicators and oscillators. They usually pick one from each category as the main reference. Most of the forex charting packages offer real-time streaming pricing. At the same time, all the calculations of the indicators are done automatically and instantaneously.

The following articles will introduce the common indicators mentioned above. Readers can choose their preferred indicators after knowing each of their mechanisms.