Different Types Of Forex Indicators Explained
Here is a synopsis of these forex indicators explained
. The purpose of an indicator is to provide guidance to an inflection point where change may occur. A forex indicator signals a change in currency price direction. There are basically two types of indicators. One type is referred to as technical and the other is considered economic. The technical approach focuses on chart patterns and price fluctuation measurement such as, RSI or relative strength index, MACD or moving average convergence divergence, stochastic oscillator, as well as other chart patterns. Economic indicators focus on macro economic factors, such as GDP growth, retail sales, CPI, industrial production, and unemployment.
First, we will look more closely at the technical signals. To ascertain which direction, up or down, is more prevalent, the RSI is a useful gauge. This normalized indicator compares the positive moves versus the negative ones. This comparison generates values from zero to one hundred. Hence, a ratio of over seventy would indicate an overbought situation and a value below thirty would indicate an oversold condition relative to expectations.
Another technical indicator compares the difference between the underlying currencies exponential moving averages. This is known as the moving average convergence divergence indicator. By graphing the differential moving average against the moving average of the differential, any cross over points would indicate a trend change.
The stochastic oscillator is another graphic measurement with values ranging between zero and one hundred percent. Stochastic calculations produce results based on price observations. In an upward trend, closing prices are concentrated on the higher part of the period's range and conversely in a down trend, the closing prices are near the extreme low of the period range. The results are two lines which indicate any regions that have extreme conditions either from a buyer's or seller's perspective. A divergence between these lines and the actual price movement indicate a powerful signal.
For one to have forex indicators explained to them, economic indicators have to be a part of the study. The primary indicator of the strength of any economy is the gross domestic product, or the sum total of all the goods and services produced by the nation in question. The measurement is conducted on a monthly, quarterly, and yearly basis at market value. However, GDP cannot be used as an indicator in isolation.
Industrial production helps measure productivity, as well. This calculation measures the manufacturing prowess of a nation. Another offshoot of this measurement is capacity utilization. The greater the amount or increase in unused capacity could well signal a decrease in economic activity and, hence, a lower currency value.
Unemployment is by far among the top most important economic factors. It is a gauge of the population's production health, meaning the number of people it takes to produce the goods and services. The greater the number of people engaged in a productive endeavor, the stronger the economic engine. As more people are employed, there is more consumption and more growth. This also is reflective in the housing statistics, as homeownership rates increase.
Another important indicator is retail sales. The retail sales data is a composite of the total receipts of broad distribution retail stores. This provides an indication of the consumer sentiment within the country and, hence, a gauge on their comfort or expectancy for future economic stability and growth. This is generally a good proxy for investor and consumer sentiment.
In measuring these economic factors, one needs to account for level comparison as the real value of prices can be affected by inflation. A good inflation gauge indicator is the CPI or consumer price index. The index measured the change in price of a set of goods and services. This can also help determine economic profit. With the combination of these economic indicators and the previous technical ones, we have forex indicators explained.
by: Cedric Welsch.
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