Forex IndicatorsPosted on September 18th, 2010 William No comments
While major banks may be able to make money off of forex trading based solely on the spread, individual investors generally need to be able to predict how the market is going to move in order to make a profit. As you might imagine, there are a lot of very smart people trying to figure out how to make this prediction; in this post, we'll briefly mention a few indicators that forex investors use.
Before we start, let's be clear on exactly what a forex indicator is. Indicators are used to find patterns; while the currency market is very chaotic, it's possible to find various inputs that will have a somewhat predictable effect on the market, and thus we can use indicators to predict how the market might behave. Naturally, different indicators will pull in different directions, contradicting each other; while it is tempting to attempt to use as many indicators as possible, perhaps a better approach is to find a half-dozen strong indicators and move only when almost all of them are in agreement.
One of the most popular tools is the moving average, which represents the average value of a currency over some specified time period,ending with the current date; as such, the average constantly changes over time, representing the market's momentum. There are a number of different moving averages; they include:
- The simple moving average takes the average closing price over the duration of the chosen period, with no weighting or smoothing
- The exponential moving average gives greater weight to more recent prices
- The smoothed moving average is similar to the exponential average, but while older information continuously receives less weight, it is never discarded altogether
- The linear regressed moving average, like the exponential moving average, gives more weight to recent prices, but uses linear weighing factors rather than exponential ones
This post will be updated to explain other indicators in the near future.