Forex Indicator Overview and LookupThe primary forex indicator types include: lagging indicators and trend indicators, and leading indicators and momentum indicators.The sections below will cover each of these forex indicator types, and provide some examples of each and their common usage. Lagging Indicators Lagging indicators generally have a delay or lag behind the current price action and provide useful information as to where the market has been, rather than predictive information about the future. A useful example of a lagging indicator is a simple moving average (see Figure 1 below). Since it is computed as an average of the previous X periods of price data, the moving average cannot help but lag behind the current exchange rate. Also, the higher X is, the more this popular forex indicator lags the current exchange rate. Still, moving averages do let you know whether the rate is higher or lower than its past average, and by how much. This forex technical indicator can give traders useful information and can also help them identify trends by smoothing out price action. Use in Trend Identification One of the primary uses of lagging indicators involves the identification of trends. Many forex traders use moving averages to smooth out exchange rate activity so that the underlying trend can become more apparent. Others might like to use another popular forex indicator known as the ADX or Average Direction Movement Index to identify and quantify the strength of exchange rate trends. Leading Indicators As the name implies, leading technical indicators tend to have predictive value and hence are thought to “lead” the price action. As a result of their predictive characteristics, a leading indicator will often provide an early signal for the entry or exit of a position. Nevertheless, the downside with leading indicators is that false signals can occur that can cause trading whipsaws, thereby increasing commissions and potential losses. Momentum Indicators Help Identify Market Extremes One popular leading indicator involves looking at the rate of change or momentum of a particular exchange rate or of its moving average. Since the momentum of a price move tends to wane before the price action actually reverses, it is commonly considered a leading indicator. An oscillator is a type of indicator that fluctuates around a central line (a “centered” oscillator) or between set levels (a “banded” oscillator) as its value moves with time. Most oscillators are momentum indicators. Examples of banded oscillators that measure market momentum include the Relative Strength Index or RSI (See Figure 1) and the Stochastics Oscillator. They each range between 0 and 100.
Both of these popular forex indicator choices provide traders with a good sense of when the market is overbought or oversold, and hence potentially due for correction or consolidation. Generally, the RSI provides an overbought signal when over 70 and an oversold signal when under 30, while the Stochastics Oscillator reads overbought above 80 and oversold below 20. Technical Indicator Lookup The following list provides some common (and not-so-common) technical indicators. Click on each name to learn more details about the indicator and how to apply it to your Forex trading.
Accumulation Distribution Indicator |
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