Forex

Introduction to Technical Indicators

Hi there!

In the this article we are going to introduce the concept of technical indicators by trying to answer some of questions that are roaming in the most of your minds.
Questions like: What are the technical indictors? What are they useful for? What are the kinds of technical indicators? How to use them to your benefits.

Let’s start where’s the beginning by defining the technical indicator!

What are the technical indicators?

At any given point on the price chart (Forex as an example) there are 6 pieces of data:
Open price, Close price, High price, Low price, Volume and Time (Figure 1).

Those pieces called price data, and they are the real representation of the market at a given point and the history of the market as well. The history of the market because any charting program saving the previous point with their data.

The technical indicator is a formula applied to some or all of the price data to generate another series of data points.
Those data point then are plotted in graphical form on the charting program (Figure 2).

As shown in figure two the RED line is the simple moving average indicator, this indicator simply calculate the moving average (the indicator formula) of the previous 20 period of data price then plot them on the chart above the price chart.

Some of indicators plot themselves on the price chart as the previous example, while the most of indicators use a separated window to plot their data points (Figure 3).

What are they useful for?

A technical indicator offers a different representation of the price data enabling you to analyze the price data and comparing its previous behavior and actions.
Every technical indicator’s formula giving a different picture of the price action with significant information about the market!
Every technical indicator has its own job, for example the simple moving average indicator (as showed in figure 2) helps in smoothing the price movement and filtering out the random noise of the price movement.

What are the kinds of technical indicators?

There are two kinds of technical indicators:

Leading indicators:

This type of indicators -as its name indicates- changes before the price changes therefore, they are predicting the future price movements. The most of the leading indicator are momentum oscillators, momentum oscillators are the indicators that measure the rate of price change.
Example of popular leading indicators: CCI (Commodity Channel Index) indicator, RSI (Relative Strength Index) indicator and Stochastic Oscillator.

Lagging indicators:

This type of indicators -as its name indicates- changes after the price changes so they are referred as trend-following indicators. They does not predict the price movement but they confirm the price movement (trend).
These indicators better work when the market develops a trend and they fail in sideway market.
Example of popular lagging indicators: Moving Average indicators and MACD.

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