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IndicatorsWhat is a Forex Indicator? A Forex indicator is a tool that notifies you of up and down trends in the market; it gathers market information and with the information gathered it represents the information to you in a very pretty and graphical form that will help you gauge the future market movement of whichever currency Pair that you are trading. Indicators give you a lot of useful information that can be very helpful to ones trading depending on how the information is used, they reveal VOLUME, where the trend is heading, potential reversals (where trend might stop and reverse) and many more useful information. So an indicator is anything that can be used to predict future financial or economical trends.

Leading and Lagging indicators

Indicators are split up into two categories Leading and Lagging indicators. Leading indicatorsLeading indicators are indicators that usually change before the economy as a whole changes. Leading indicators are also called oscillators, They are therefore useful as short-term predictors of the economy. Stock market returns are a leading indicator: the stock market usually begins to decline before the economy as a whole declines and usually begins to improve before the general economy begins to recover from a slump. Other leading indicators include the index of consumer expectations, building permits, and the money supply. The Conference Board publishes a composite Leading Economic Index consisting of ten indicators designed to predict activity in the U. S. economy six to nine months in future. A leading indicator gives a signal before the new trend or reversal occurs.

A lagging indicator gives a signal after the trend has started. Lagging indicators are indicators that usually change after the economy as a whole does. Typically the lag is a few quarters of a year. The unemployment rate is a lagging indicator: employment tends to increase two or three quarters after an upturn in the general economyIn finance, Bollinger bands are one of various lagging indicators in frequent use. In a performance measuring system, profit earned by a business is a lagging indicator as it reflects a historical

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Disclaimer: Forex trading, although liquid and profitable it also has high risks and you could lose all your money invested if you are not knowledgeable of what you are doing, like any other investments please research and ask a number of financial advisers before you make any investment or speculative decisions. Global Forex Institute will not be held accountable for any loses that can be incurred by its clients in the trading accounts, we do not have access to clients trading account and we do not provide trading advice so we cannot be held accountable for anything pertaining to our clients trading decisions. Please do not sign any documents or open any trading accounts unless you have understood and agreed to the statement above or unless you have consulted a financial expert on the matter.

performance; similarly, improved customer satisfaction is the result of initiatives taken in the past Lagging are also trend-following indicators or momentum indicators

Trend IndicatorsTrend indicators help you to determine where the overall trend is going, in trading we were taught that the trend is your friend and whatever you do you need to follow the trend while trading because that is where the money is, while the statement mentioned can be argued the fact still remains that trading is about predicting the future movement of the market and it is important to know where the current market is going because the probabilities are very high that the trend will continue to go wherever it is going so it is important to know where the current trend is going, we can see where the current trend is heading by drawing simple trend lines ( We hope that by now you know how to draw trend lines) or you can just turn to your indicators and they can tell you.

MACDMACD is the simplest and very reliable indicators used by many Forex traders.MACD (Moving Average Convergence/Divergence) has in its base Moving Averages. It calculates and displays the difference between the two moving averages at any time. As the market moves, moving averages move with it, widening (diverging) when the market is trending and moving closer (converging) when the market is slowing down and possibility of a trend change arise.

Basics behind MACD indicatorMACD indicator is based on Moving Averages in their simplest form. MACD measures the difference between faster and slower moving average: 12 EMA and 26 EMA (standard).MACD line is created when longer Moving Average is subtracted from shorter Moving Average. As a result a momentum oscillator is created that oscillates above and below zero and has no lower or upper limits. MACD also has a Trigger line. Combined in a simple lines crossover strategy, MACD line and trigger line crossover outperforms EMAs Directors: S. Ndlovu; S.Shezi Physical address: 3rd Floor West Palm Building, Palm Boulevard Gateway UmhlangaTel: 031 583 57200mobile: 084 415 4145 or 073 954 8150


crossover. Besides being early on crossovers MACD also is able to display where the chart EMAs have crossed: when MACD (12, 26, 9) flips over its zero line, if indicates that 12 EMA and 26 EMA on the chart have crossed.

How does MACD indicator workIf to take 26 EMA and imagine that it is a flat line, then the distance between this line and 12 EMA would represent the distance from MACD line to indicator's zero line. The further MACD line goes from zero line, the wider is the gap between 12EMA and 26 EMA on the chart. The closer MACD moves to zero line, the closer are 12 and 26 EMA.MACD histogram measures the distance between MACD line and MACD trigger line.



Trading MACD DivergenceMACD indicator is famous for its MACD Divergence trading method. Divergence is found by comparing price shifts on the chart and MACD values.MACD Divergence phenomenon occurs as a result of shifting forces on the Forex market. For example, while Sellers may seem to be dominating the market at the moment and price continues to trend down, there already might be signals for an overall weakening of Sellers power. These key warning moments can be observed with MACD indicator. What Forex traders would see is that despite price making new Lower Lows, MACD doesn't confirm that and instead registers a Higher Low, signalling that Sellers are running out of steam and a trend change is on its way. Opposite will be true for Buyers.

How to trade MACD DivergenceWhen MACD line (on our screenshot it is a blue line) crosses Signal line (red dotted line) - we have a point (top or bottom) to evaluate. With two most recent MACD line tops or bottoms find corresponding tops/bottoms on the price chart. Connect MACD tops/bottoms and chart



tops/bottoms. Evaluate the lines received, as shown on the larger screenshot (click on the small picture to enlarge).

With MACD divergence spotted Enter the market when MACD line crosses over its zero point. Another entry strategy is to find 2 most recent swings high or low on the chart and draw a trend line trough them; and then set an Entry order on the breakout of that trend line. MACD divergence trading method used not only to predict trend turning points, but also for trend confirmation. A current trend has high potentials to continue unchanged in case no divergence between MACD and price was established after most recent tops/bottoms evaluation.

Moving Averages: EMA and SMAMoving Averages (MAs) are among most commonly used indicators in Forex. They are easy to set and easy to interpret. Speaking simple, moving averages simply measure the average



move of the price during a given time period. It smooth’s out the price data, allowing to see market trends and tendencies.

How to use Moving Averages

Moving Average is a trend indicator.

Besides its obvious simple function a Moving Average has much more to tell:

In Forex moving average is used to determine:

1. Price direction - up, down or sideways.2. Price location - trading bias: above Moving average - buy, below Moving average - sell.3. Price momentum - the angle of the Moving average: rising angle - momentum holds, falling angle – momentum pauses or stops.4. Price support/resistance levels.

There are 2 types of moving averages that we will be focusing on, they are:

SMA - Simple Moving Average - shows the average price for a given period of time.



EMA - Exponential Moving average - gives priority to most recent data, thus reacts to price changes quicker than Simple Moving Average.

Most common settings for Moving Averages in Forex200 EMA and 200 SMA100 SMA50 SMA34 SMA20 EMA and 20 SMA10 EMA and 10 SMA

Try and test and then choose your favourite set of Moving Averages.

Parabolic SAR

Trading with Parabolic SAR involves the following signals:PSAR dot is above the price - downtrend.PSAR dot is below the price - uptrend.

Parabolic SAR indicator is a trend indicator, which tells Forex traders about price stop-and-reverse points as well as trend direction. Its concept of usage is easy to understand from the first look. Parabolic SAR appears as a set of dotted lines, where each dot represents certain time period. When price is above Parabolic SAR dots, Forex traders should be holding Long



positions only. Once Parabolic SAR dots come on top of the price - it is time to change trading positions to Short. Parabolic Sar indicator literally allows being in trade all the time.

How to trade with Parabolic SAR indicatorHowever, trading with Parabolic SAR is not that simple; not all Parabolic SAR reversal signals can be traded profitably. Let's turn to advice given by the developer of Parabolic SAR indicator - J. Welles Wilder. He suggests using Parabolic SAR, first of all, for trailing stops and finding the best exits. The way Forex traders use Parabolic SAR is by simply setting a Stop loss order at the level of the most recent SAR dot appearing on the chart. Stop is then trailed along with each new Sar dot till trend remains intact. Once Parabolic SAR indicator changes its position - SAR dots appear on the opposite side of the price - the trade is closed. Welles Wilder doesn't recommend using Parabolic SAR as a stand alone indicator. The main reason for that is: Parabolic SAR can easily create whip-saws (false signals) during periods of market consolidation. The Parabolic SAR works best during strong trending periods, which Wilder himself estimates occur roughly 30% of the time. Thus Forex traders will need other Forex indicators to identify those strong trending periods. For himself, Welles Wilder developed ADX indicator - another trend indicator - which tells what kind of trend is dominant and how strong the trend is. Upon knowing the trend and its health Forex traders can pick appropriate signals from Parabolic SAR and disregard the rest. How do you Directors: S. Ndlovu; S.Shezi Physical address: 3rd Floor West Palm Building, Palm Boulevard Gateway UmhlangaTel: 031 583 57200mobile: 084 415 4145 or 073 954 8150


determine the trend if you don't want to use ADX. Try 50 EMA. Price readings above it would suggest an uptrend, below - downtrend.

Stochastic Indicator

Trading with Stochastic indicator involves the following signals:

Stochastic lines cross — indicates trend change.Stochastic readings above 80 level — currency pair is overbought,Stochastic staying above 80 level — uptrend is running strong.Stochastic exiting 80 level downwards — expect a correction down or beginning of a downtrend.Same for readings below 20 level — currency pair is oversold,staying below 20 — doentrend is running strong, exiting upwards above 20 — expect an upward correction or a beginning of an uptrend.

Stochastic is a momentum oscillator, which consists of two lines: %K - fast line, and %D - slow line. Stochastic is plotted on the scale between 1 and 100. There are also so called "trigger levels" that are added to the Stochastic chart at 20 and 80 levels. Those lines suggest when the market is oversold or overbought once Stochastic lines pass over them.

Let’s look at three methods of trading with Stochastic indicator.



Method 1. Trading Stochastic lines crossover

This is the simplest and common method of reading signals from Stochastic lines as they cross each other. Stochastic %K and %D line work similar to moving averages and:when %K line from above crosses %D line downwards traders open Sell orders.when %K line from below crosses %D line upwards traders open Buy orders. Stochastic lines crossovers that happen above 80% level and below 20% level are treated as strongest signals, compare to crossovers outside those levels. Traders may choose sensitivity of their Stochastics. The smaller the Stochastic parameters, the faster it will react to market changes, the more crossovers will be shown. Sensitive Stochastic (for example 5, 3, 3) is useful for observing rapidly changing market trends. But because it is too choppy it should be traded in combination with other indicators to filter out Stochastic signals.

Method 2. Trading Stochastic oversold/overbought zones



Stochastic by default has 80% level, above which market is treated as overbought, and 20% level, below which market is considered oversold.

It is important to remember that while in sideways moving market a single Stochastic lines crossover that occur above 80% or below 20% will most of the time result in a fast predictable trend change, in trending market could mean just nothing. When price is trending well, Stochastic lines may easily remain in overbought/oversold zone for a long period of time while crossing there multiple times. That’s why a method of trading overbought/oversold zones stands up. The rules here are to wait until Stochastic lines after being in overbought/oversold zone come out from it. E.g. When stochastic was trading for some time in overbought zone – above 80% level, traders wait for the lines to slide down and eventually cross 80% level downwards before considering to take Short positions. Opposite for Long positions: wait till Stochastic lines come into the oversold zone (below 20% level); wait further until Stochastic lines eventually cross 20% level upwards; initiate a buy order once Stochastic lines are firmly set, e.g. a trading bar is closed and Stochastic lines cross over 20% mark is fixed.

Method 3. Trading Stochastic divergence



Traders are looking for a divergence between Stochastic and the price itself. At times when the price is making new lows while Stochastic produces higher lows creates dissonance in the picture. It is called divergence. Divergence between price and Stochastic readings suggest a forming weakness of a main trend and therefore its possible correction.

Bollinger BandsBollinger Bands – a simple yet powerful indicator, ideal for traders who like visual style of trading. Created by John Bollinger, the Bollinger Bands indicator measures market volatility and provides a lot of useful information:- trend direction- trend continuation or pausing- periods of market consolidationDirectors: S. Ndlovu; S.Shezi Physical address: 3rd Floor West Palm Building, Palm Boulevard Gateway UmhlangaTel: 031 583 57200mobile: 084 415 4145 or 073 954 8150


-periods of upcoming large volatility breakouts- relative market tops and bottoms and price targets.

Bollinger Bands interpretationBollinger Bands indicator consists of three bands, which 85% of the time retain price within their boundaries:

- Simple moving average (SMA) in the middle (with default value of 20)- Lower band - SMA minus 2 standard deviations- Upper band - SMA plus 2 standard deviations

The default value for Bollinger Bands in Forex is (20,2) - the settings we'll be using for our screenshots. When the market becomes more volatile, the bands will correspond by widening and moving away form the middle line. When the market slows down and becomes less volatile, the bands will move closer together.

How to trade with Bollinger BandsPrice moves in upper bands channel – uptrend, lower – downtrend. It is very simple to identify dominating price direction by simply answering the question: in what part of the Bollinger Bands the price is currently trading? If price stays above the middle line – in the upper channel – we’ve got a prevailing uptrend. If below the middle line – in the lower channel – we have a prevailing downtrend.



And just in case you’ve missed the beginning of the trend, Bollinger Bands can help you get in the trend with good risk to reward ratio on a pullback. Simply look for dips towards the middle Bollinger Bands line and enter in the direction of the trend.

Low volatility, followed by high volatility breakouts

When Bollinger Bands start to narrow down to the point when they are visually forming a neat tight range (measured no other way than by eye), as shown on the screenshot below, the situation signals of an upcoming increase in volatility once market breaks outside the bands. It is similar to a quiet time before the storm. The more time passes while price is contained within the narrow Bollinger Bands range, the more aggressive and extensive breakout is expected.



Price moves outside the bands – trend continuation

When price moves and closes outside the Bollinger upper or lower bands, it implies a continuation of the trend. With it Bollinger Bands continue to widen as volatility rises. But it is not always straight forward: at some point closing outside Bollinger Bands will mean price exhaustion and upcoming trend reversal.

Bollinger Bands alone are not able to identify continuation and reversal patterns and require support from other indicators, such as often RSI, ADX or MACD – in general all types indicators that highlight markets from a different than volatility and trend prospective (momentum, volume, market strength, divergence etc).



Trend reversal patterns with Bollinger Bands

As a rule, a candle closing outside Bollinger Bands followed later by a candle closing inside the Bollinger Bands serves as an early signal of forming trend reversal. It is, however, not a 100% assurance of an immediate trend reversal.



Since long aggressive trend develop not that often, there will be on general more reversals than continuation cases, still only filter signals form other indicators may help to spot true and false market tops and bottoms. Speaking of the last, Bollinger Bands are also capable of aiding double top and double bottom pattern recognition and trading.

Introduction to RSI indicatorRelative Strength Index (RSI) - is another great momentum indicator developed by Welles Wilder. Standard period settings for RSI are 14 periods, which can be applied to any time frame. RSI indicator compares the average of up and down closes for a specific period of time.



Trading with RSI indicator involves the following signals:

• RSI moving above 50 level — uptrend is confirmed, below 50 — downtrend is confirmed.

• RSI peaking above 70 level — market is overbought.

• RSI staying above 70 level — uptrend is running strong.

• RSI exiting 70 level — downtrend is underway, or at least a correction down is due. (Opposite for RSI falling below 30.)

• RSI trend line breakout - early warning about chart trend line breakout.

• RSI diverging from price on the chart — an early warning of a possible trend change.

RSI indicator is often referred as an overbought/oversold indicator, however, this is not exactly accurate. RSI doesn't provide Buy/Sell signals upon reaching oversold/overbought areas, there are certain rules, which help to identify the right timing for entries and exits.



Readings above 70 indicate an overbought market, while readings below 30 indicate an oversold market.However, once RSI advances above 70 it is not yet a signal for an immediate Selling, since RSI may stay in overbought area for a long-long time. In fact, when a strong uptrend develops, readings above 70 are just a beginning of a great upward move; an opposite is true for a downtrend and readings below 30.

In order to enter at the right moment (on the true market reversal) Forex traders should wait for RSI to leave its overbought/oversold area. For example, when RSI goes above 70, Forex traders would prepare to Sell, but the actual trade will take place only when RSI crosses down below 70. Opposite true for an oversold RSI: once RSI goes below 30, traders wait for the indicator to come out of an oversold area and rise above 30 before placing a Buy order.



Forex traders also use 50 level of the RSI indicator, which separates buying forces from selling forces on the market. Certain trading strategies use RSI 50 level to confirm Long and Short entries by looking at a positioning of the RSI in relation to its 50 level.

RSI trend linesRSI indicator has got another handy feature: Forex traders use RSI to draw trend lines. While RSI's trend line stays intact, it confirms that a trend holds well.



With RSI trend lines Forex traders are able to receive a much earlier warning about upcoming trend changes since RSI trend lines witness a breakout few candles earlier than chart trend lines. RSI trend lines are especially useful on large time frames.

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Create wealth with Forex Trading - Indicators are …globalforexinstitute.co.za/wp-content/uploads/2014/04/… · Web viewGlobal Forex Institute will not be held accountable for any