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Technical Analysis Tools: Understanding Technical Indicators
Trend
One uses trend indicators to smooth the movement in prices so that rather than a whole lot of movement across the chart, a smooth trend can be seen. One can understand whether there is an upward, downward or sideways trend.
(Example of Trend Indicator: Trend lines, Moving Averages)
Strength
While the indicators may be forecasting certain prices for the currency, a lot depends on what the opinion of the market is as well. This can be reflected in strength indicators that show what are the positions taken by the various players in the market. The volume of transactions, for example, can contribute to a strength indicator.
Volatility
One can expect volatility in the market when there is an anticipation of change in prices. Volatility marks the degree to which the price is fluctuating on a day-to-day basis.
(Example of Volatility Indicator: Bollinger Bands)
Cycle
Markets have a fixed way of reacting and behaving during certain recurrent events like elections or even seasons. By charting these events, one can determine when a particular market pattern is to occur.
(Example of Cycle Indicator: Elliott Wave)
Resistance and Support
Studies of previous market data have shown that markets keep falling up to a certain price where they are supported and then reverse direction. Similarly, when they keep rising, they meet resistance at a certain price and again reverse direction. These price levels are termed support and resistance.
Momentum
As the name suggests, this indicator is used to determine how strong or weak a particular trend is over time. Typically, as a trend starts, the momentum is high and when the trend is changing, the momentum is low. If the movement of the price is in one direction and that of the momentum in another then this suggests that there is a certain weakness.
Typically, if the change in price occurs when the momentum is weak, then it suggests that there will be no more movement in that particular direction.
On the other hand, if the prices are relatively flat and the momentum is strong, it suggests a possible change in the direction of price. (Example of Momentum Indicator: MACD, Stochastic, RSI)