Technical analysis represents forecasting future prices based on previous ones. If history repeats itself, technical analysis is here to prove it right.
Traders look on the left side of the screen (a.k.a. past market price action) and try to forecast future price levels on the right side of it. Besides trading theories (e.g., Elliott Waves Theory, Gann, Gartley, Drummond Geometry, Dow Theory, etc.), various technical indicators exist.
Most of them are offered by default by any trading platform. The most popular trading platform among retail Forex traders, the MetaTrader, offer the possibility to import various custom indicators, besides the ones provided with the default settings. In fact, without much of an effort, traders can upload custom indicators to any trading platform.
Two main categories of trend indicators exist, and any online trading platform offers them: trend indicators and oscillators.
A trend indicator follows the trend and traders use it to find better entries on market corrections. Here’s a list of the most representative ones:
- Moving Averages. Every trader, from Singapore to the United States, knows what a moving average is: it averages the prices of a specified period and plots a current value. Typically, it considers the closing price of the previous period and the most popular ones are the following: SMA (Simple Moving Average), EMA (Exponential Moving Average) and DMA (Displaced Moving Average). Traders use them to find out support and resistance levels in the underlying trend.
- Bollinger Bands. These are three lines plotted on the original chart and John Bollinger intended to reflect changes in the underlying trend, as well as to ride the primary trend. The price spends most of the time within the upper and lower Bollinger Bands, so traders interpret the breakouts with buying and selling in the new direction.
- Ichimoku. One of the most powerful trend indicators, the Ichimoku is a set of indicators comprising moving averages, a cloud that defines a trend, and has multiple uses. Traders look for the projected cloud to offer support and resistance levels and interpret the market accordingly.
An oscillator appears in a separate window, typically at the bottom of a chart. Each oscillator has a different methodology to plot the current values, and traders use them to spot the differences between the actual price movement and the oscillator’s movement.
The most popular are:
- Relative Strength Index. The RSI travels only in positive territory, having values from zero to one hundred. It came with two levels, the thirty and the eighty levels, with the market being overbought and oversold when the oscillator moves beyond those areas. When it happens, traders open a position in the opposite direction. However, that works only when ranging conditions are present. But, the RSI, like any oscillator, shows divergences with the price, making it a valuable tool to spot trend reversals.
- Commodity Channel Index. The CCI shows positive and negative values, and it reflects overbought and oversold conditions too. However, when compared with the RSI, the CCI is more volatile and reaches these areas quickly.
- Moving Average Convergence/Divergence. The MACD is both an oscillator and a trend indicator. While it appears listed as an oscillator, it has a trending component as well. Traders look for divergences between the actual price and the MACD, but also to ride trends when the indicator crosses the zero level.
Many other indicators exist, but the idea is pretty much the same: trend indicators appear on the actual chart, with traders looking to buy dips in bullish trends and spikes in falling ones.
On the other hand, oscillators show divergences between the price and the oscillator’s move, as well as overbought and oversold levels.
As part of the technical analysis, trend indicators and oscillators help traders forming an educated guess about the future price action. Therefore, traders use them to buy or sell a currency pair in anticipation of the next move that may be a profitable one.