Reading Indicators in Technical Analysis

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Forex technical analysis, traders, and statisticians use financial markets indicators to take a statistical approach instead of a subjective trading approach. They will refer to these things as money flow, volatility, momentum, and trends to get more insights into possible price movements. There are thousands of indicators available, so there is also a bunch of debate about which ones are the best.

The Leading Indicators

One of the two main types of indicators available for traders is the leading indicators. They tend o precede all price movements and predict the future. Also, people usually use it for range bounding trading because it can provide a bit of a heads up on a possible breakout of consolidation – a very powerful piece of information to have.

Furthermore, some of the most known leading indicators include the Stochastic Oscillator and the Relative Strength Indicator (RSI). The downside of leading indicators can ‘jump the gun,’ and give false signals sometimes. Due to that, many people will use more than just the leading indicator and utilize it as a secondary indicator past simple price action. Like most indicators, there is a complex mathematical formula showing momentum, and the market is ready to go.

The Lagging Indicators

Contrarily, lagging indicators typically follow price movements. They are most useful in a well-defined trend, while they tend to present signals much later than leading indicators. Unfortunately, this comes with the side effect of being less profitable, albeit more reliable. Also, lagging indicators have been famous for years and are still among the most basic indicators traders use.

A few lagging indicators include Bollinger Bands and the Moving Averages.

Indicators are made in several different ways:

  • Oscillators

So far, oscillators are the most common technical indicator, generally being bound in some kind of range. Most of the time, there is a full range between two values representing both overbought and oversold conditions. Usually, there is a type of line or indicator, letting people know when the market might be a bit far into one realm or another. A few examples may include the Stochastic Oscillator, Moving Average Convergence Divergence (MACD), and the Commodity Channel Index (CCI). Though they might measure overbought and oversold conditions with different formulas, they all function in the same way.

  • Non-Bounded

The non-bounded indicator is not too popular, but people will quite often use it to form signals in the trading system to show strength or weakness in a trend. Compared to oscillators, they don’t usually have a set range. For instance, the accumulation or distribution line indicator measuring the money flow into security is an example of a non-bounded indicator.

But in the forex world, people will see this as nearly impossible to measure. Still, there are several variations of volume offered by forex brokers using the information from their proprietary servers that make up a fraction of the market.

The Indicators

Some trading systems use indicators solely, resulting in people using them less commonly these days. One of the most popular indicators only systems is the moving average crossover system. And this is plotting of at least two moving averages on a chart.