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Forex Indicators

Leading and Lagging Indicators

By: Danielle Franklin
(0 Votes) Forex trader needs indicators to determine important entry and exit points. Forex Indicators predict financial and economic trends. Forex indicators can be categoried into two types, each of which makes a different prediction.

The first type of forex indicator is called leading. It is an indicator that shows you when to buy before a new trend or reversal. You can compare leading indicators to a virus scan that catches a virus before it attacks your computer! In forex market, leading indicators work in the same pattern, but unfortunately they aren’t as accurate. How is leading indicator formed? It follows the market changes and identifies repetitive patterns. With that information, leading indicator forecasts the future. When you depend on leading indicators, you might experience a lot of fake signals which can misinform you and cause a wrong decision.

The second type of forex indicator is called lagging. It is an economic indicator that tells you when a new trend has already started. Think of lagging indicator as a virus scan that tells you that your computer has been infected! Lagging indicators are definitely more trustworthy since they point out exactly when the price has already been changed and a new trend is visible. The disadvantage is obvious – you miss the beginning of the trend!! And since the biggest profit lays in the beginning of the trend, you obviously will miss a big chunk of profit.

Oscillators indicators are leading indicators. Just a reminder, oscillators are the ones that are drawn within boundaries of two lines. The oscillator signals buy or sell based on the set levels of the range. The leading indicators that we have covered here at ForexVote are Relative Strength Index (RSI) and Stochastics.

Momentum indicators are lagging indicators. Momentum is the rapid change of price when related to security analysis. Momentum indicators track momentum in the price (duh, that’s obvious!). Lagging indicators follow the price changes and, despite the quality of their predictions are less profitable, are very useful during trending periods,. The lagging indicators covered in ForexVote.com are Moving Averages and Bollinger Bands.

Tutorial - Forex Indicators

Relative Strength Index (RSI) Indicator

By: Danielle Franklin
(0 Votes) RSI ( Relative Strength Index) was introduced in 1978 by Welles Wilder. Another name for RSI which is widely used is price-following oscillator. When you look at Relative Strength Index it closely reminds you of stochastics. It is forex technical indicator that evaluates latest gains and losses in order to figure out overbought and oversold conditions in forex market. Just like stochastics RSI ranges from 0 to 100. You don’t need to memorize this, but just for very curious minds below is its formula:

RSI = 100 / (1 + DP/ UP)

where

UP is a moving average of increasing price within selected period of time

and

DP is a moving average of decreasing price within selected period of time 

The use of Relative Strength Index RSI is also similar to stochastics. Whenever you see the indicator going lower then 20, that hints for oversold. Whenever you see the indicator going higher then 80, that hints for overbought.

Relative Strength Index is one of the popular trading tools. It can help you tremendously to spot trend formation. The possible uptrend could be confirmed with RSI being above 50 mark and the possible downtrend could be confirmed with RSI being below 50 mark.

Tutorial - Forex Indicators

Stochastics Indicator

Posted: 30 Apr, 2009 By: Danielle Franklin Last Updated on 10 May 2012

Stochastics indicator was developed in late 1950s by George Lane. It is designed to hint us when the trend might end.

If you take a look at Stochastics it will somewhat remind you of MACD. Stochastics are made of two lines which are drawn according to the highest and lowest prices in a selected period of time. The two lines are the following:

1. a “main line” which is drawn as a solid line and is called %K

2. a simple moving average which is drawn as a dotted line and is called %D

There are three types of Stochastics: full, fast and slow. All of the types are almost identical; except for one is smoother then the other. The smoothest one of all, you can probably guess by now, is the full stochastics, then goes the fast type and the last one is the slow.

What does this all mean and how to apply it? Stochastics indicators are ranging from 0 to 100. The upper limit marked at 80% and the lower limit is marked at 20%. When stochastics lines go above the upper limit it shows us that the market is overbought. When stochastics lines go below the lower limit it shows us that the market is oversold. As for the application, just remember that you have to BUY whenever the market is oversold and to SELL when ever the market is overbought. You as forex trader should watch out closely for the buy and sell signals to make the right decision. Another BUY signal is when %K line crosses %D line either from below upwards or from above downwards.

Parabolic SAR Indicator

By: Danielle Franklin
(0 Votes) Parabolic SAR was developed by J Welles Wilder in 1976 and is a useful trend indicator in technical analysis. While most of indicators show us the beginning of a new trend, parabolic SAR points to the end of a trend. 

Parabolic SAR stands for Parabolic Stop and Reverse and parabolic comes from the word parabola. The term “parabolic” is used since the shape of the indicator on a forex chart resembles a parabola. Another name for Parabolic SAR is Reversal System.

When you use parabolic SAR the chart will have little dots placed along the graph. The indication of potential reversals is noticeable when the dots “shift” their position from above the graph to below the graph and vise versa.

Parabolic SAR indicator is very easy to use. It is a great indicator to show the exit points in the forex market that trends strongly. All you have to remember is that when the dots are below the graph you should buy and, on the other side, when the dots are above the graph, you should sell. With this trend indicator you can easily find the right place to put your stops right where the parabolic dots are.

The disadvantage of Parabolic SAR is that it doesn’t work very well with non-trending markets. In non-trending markets Parabolic SAR will give out wrong reversal signals and it might cause you to make early entries or exits.

The parabolic indicator is actually a very useful indicator to adopt in the Forex market, mainly because the Forex market often trends strongly. When market prices soar (or crashes) without a retracement or pullback, it's quite hard for traders to choose a good stop-loss level when using other indicators. With the parabolic however, you can easily place your stops near to the parabolic "dots".

Tutorial - Forex Indicators

MACD Indicator

By: Danielle Franklin

There are 3 essential parameters that make MACD chart work:

  1. number of periods that shows faster moving average.
  2. number of periods that shows slower moving average.
  3. number of bars that shows the relationship (or a difference, in other words) between the faster and slower moving averages.

How is MACD calculated? Here is the formula:

12-day Exponential Moving Average (EMA) MINUS 26-day EMA

Also, you need a 9-day EMA which is called a "Signal Line". 9-day EMA is "drawn" on top of MACD chart and shows forex trader when to buy or sell.

There are 3 methods to be used with MACD:

  1. Whenever MACD is below the signal, it indicates that it is time to sell.
  2. Whenever MACD is above the signal, it indicates that it is time to buy.
  3. MACD crossings occur when the fast line crosses the slow line. When this happens and the fast line starts to drift away from the slow line, this is often considered an indicator of a new trend.

The disadvantage of MACD indicator is there is a bit of lag. This happens because moving averages are simply the averages of historical prices and therefore there is a lag behind price. Despite the disadvantage, MACD is still considered the most favorite indicator among forex traders.

Tutorial - Forex Indicators

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