Forex
Indicator Definitions
Simple Moving
Average (SMA) - The average price of a given time period, (5 minutes,
10 minutes, 1 day, etc.) where each of the chosen periods carries the
same weight for the average. Example using the closing prices of the
USD/JPY currency pair: Day 1 close = 124.00, Day 2 close = 126.00, Day
3 close = 124.00, Day 4 close = 126.00; The 4-day SMA is 125.00 (the
average of the prior four closes).
Exponential Moving
Average (EMA) - Here, the averages are calculated with the recent
forex rates carrying more weight in the overall average; for example:
In a 10-day exponential moving average, the last 5 days will have more
effect on the average than the first 5 days. The idea is to use the
most recent data as a better indication of trend direction.
Bollinger Bands
- The basic interpretation of Bollinger Bands is that prices tend to
stay within the upper and lower bands. The distinctive characteristic
of Bollinger Bands is that the spacing between the bands varies based
on the volatility of the prices. During periods of extreme currency
price changes (i.e., high volatility), the bands widen to become more
forgiving. During periods of low volatility, the bands narrow to contain
currency prices. The bands are plotted two standard deviations above
and below a simple moving average. They indicate a "sell" when above
the moving average (or close to the upper band) and a "buy" when below
it (or close to the lower band). The bands are used by some forex traders
in conjunction with other analyses, including RSI, MACD, CCI, and Rate
of Change.
Parabolic SAR
- The Parabolic SAR (stop-and-reversal) is a time/price trend following
system used to set trailing price stops. The Parabolic SAR provides
excellent exit points. Forex traders using this technical indicator
should close long positions when the price falls below the SAR and close
short positions when the price rises above the SAR. If you are long
(i.e., the price is above the SAR), the SAR will move up every day,
regardless of the direction the price is moving. The amount the SAR
moves up depends on the amount that currency rates move.
Rate of Change
- The oldest closing price divided into the most recent one.
RSI (Relative
Strength Index) - The RSI is a price-following oscillator that ranges
between 0 and 100. A popular method of analyzing the RSI is to look
for a divergence in which the currency price is making a new high, but
the RSI is failing to surpass its previous high. This divergence is
an indication of an impending reversal. When the RSI then turns down
and falls below its most recent trough, it is said to have completed
a "failure swing." The failure swing is considered a confirmation of
the impending reversal in the price of the currency.
Stochastics
- Stochastic studies are based on the premise that as prices rise, closing
prices tend to be near the high value. Conversely, as prices fall, closing
prices are near the low for the period. Stochastic studies are made
of two lines, %D and %K, that move between a scale of 0 and 100. The
%D line is the moving average over a specified period of time of the
%K line. The %K line measures where the closing price of a currency
is compared to the price range for a given number of periods.
Momentum
- Designed to measure the rate of price change, not the actual price
level. Consists of the net difference between the current closing price
and the oldest closing price from a predetermined period. The Momentum
indicator can be used as either a trend-following oscillator similar
to the MACD or as a leading indicator.
MACD - Moving
Average Convergence/Divergence - Consists of two exponential moving
averages that are plotted against the zero line. The zero line represents
the times the values of the two moving averages are identical. The MACD
is calculated by subtracting a 26-day moving average of a currency's
price from a 12-day moving average of its price. The result is an indicator
that oscillates above and below zero. When the MACD is above zero, it
means the 12-day moving average is higher than the 26-day moving average.
This is bullish as it shows that current expectations (i.e., the 12-day
moving average) are more bullish than previous expectations (i.e., the
26-day average). This implies a bullish, or upward, shift in the forex
rate. When the MACD falls below zero, it means that the 12-day moving
average is less than the 26-day moving average, implying a bearish shift
in the currency.
ADX - Measures
the strength of a prevailing currency trend and whether or not there
is direction in the currency market. Plotted from zero on up, usually
a reading above 25 can be considered directional.
William's %R
- A momentum indicator that measures overbought/oversold levels in the
price of a currency. The interpretation of Williams' %R is very similar
to that of the Stochastic Oscillator, except that %R is plotted upside-down
and the Stochastic Oscillator has internal smoothing. Readings in the
range of 80 to 100% indicate oversold, while readings in the 0 to 20%
range suggest overbought.
Volatility
- Measures the overall volatility of a currency in a given time period.
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