Technical Indicators Challenge: How many can you name?

Types of Technical Indicators

There are four main types of technical indicators: Trend Following, Oscillators, Volatility, and Support/Resistance. They are grouped based on their function, which ranges from revealing the average price of a currency pair over time to providing a clearer picture of support and resistance levels.

List of Technical Indicators

1.Trend Indicators

Trend-following indicators were created to help traders trade currency pairs that are trending up or trending down. We have all heard the phrase ‘the trend is your friend’ – these indicators can help point out the direction of the trend and can tell us if a trend exists.

Moving Average Indicator

A Moving Average is a technical tool that averages a currency pairs price over some time. The smoothing effect this has on the chart helps give a clearer indication of what direction the pair is moving – either up, down, or sideways. There are a variety of moving averages to choose from, with straightforward Moving Averages and Exponential Moving Averages being the most popular.

Ichimoku Indicator

Ichimoku is a complicated-looking trend assistant that is simpler than it appears. This Japanese indicator was created to be a standalone indicator that shows current trends, displays support/resistance levels and indicates when a trend has likely reversed.

ADX Indicator

The Average Direction Index wont tell you whether the price is trending up or down, but it will tell you if the price is trending or is ranging. This makes it the perfect filter for either a range or trend strategy by having sure you are trading based on current market conditions.

2.Oscillator Indicators

Oscillators give traders an idea of how momentum is developing on a specific currency pair. When the price treks higher, oscillators will move higher. When the price drops lower, oscillators will move lower. Whenever oscillators reach an extreme level, it might be time to look for a price to turn back around to the mean.

However, just because an oscillator reaches ‘Overbought’ or ‘Oversold’ levels doesnt mean we should try to call it a top or a bottom. Oscillators can stay at extreme levels for a long time, so we need to wait for a valid sign before trading.

RSI Indicator

The Relative Strength Index is arguably the most popular oscillator to use. A big component of its formula is the ratio between the average gain and average loss over the last 14 periods. The RSI is bound between 0 – 100 and is considered overbought above 70 and oversold when below 30. Traders generally look to sell when 70 is crossed from above and look to buy when 30 is crossed from below.

Stochastics Indicator

Stochastics offer traders a different approach to calculating price oscillations by tracking how far the current price is from the lowest low of the last X number of periods. This distance is then divided by the difference between the high and low prices during the same number of periods. The line created, %K, is then used to create a moving average, %D, that is placed directly on top of the %K.

CCI Indicator

The Commodity Channel Index is different than many oscillators in that there is no limit to how high or how low it can go. It uses 0 as a centerline with overbought and oversold levels starting at +100 and -100. Traders look to sell breaks below +100 and buy breaks above -100.

MACD Indicator

The Moving Average Convergence/Divergence tracks the difference between two EMA lines, the 12 EMA and 26 EMA. The difference between the two EMAs is then drawn on a sub-chart (called the MACD line) with a 9 EMA drawn directly on top of it (called the Signal line). Traders then look to buy when the MACD line crosses above the signal line and look to sell when the MACD line crosses below the signal line as seen here. There are also opportunities to trade divergence between the MACD and price.

3.Volatility Indicators

Volatility measures how large the upswings and downswings are for a particular currency pair. When a currency‘s price fluctuates wildly up and down it is said to have high volatility. Whereas a currency pair that does not fluctuate as much is said to have low volatility. It’s important to note how volatile a currency pair is before opening a trade, so we can take that into consideration with picking our trade size and stop and limit levels.

Bollinger Bands Indicator

Bollinger Bands prints three lines directly on top of the price chart. The middle ‘band’ is a 20-period straightforward moving average with an upper and low ‘band’ that is drawn two standard deviations above and below the 20 MAs. This means the more volatile the pair is, the wider the outer bands will become, giving the Bollinger Bands the ability to be used universally across currency pairs no matter how they behave.

ATR Indicator

The Average True Range tells us the average distance between the high and low price over the last set number of bars (typically 14). This indicator is presented in pips where the higher the ATR gets, the more volatile the pair, and vice versa. This makes it a perfect tool to measure volatility.

4.Support/Resistance Indicators

Support and resistance are key to technical analysis. The concept refers to the price levels on charts that form barriers to an asset price being pushed in a given direction.

Pivot Points

Pivot Points are one of the most widely used in all markets including equities, commodities, and Forex. They are created using a formula composed of high, low, and close prices for the previous period. Traders use these lines as potential support and resistance levels, levels that the price might have a difficult time breaking through.

Donchian Channels

Price channels or Donchian Channels are lines above and below recent price action that show the high and low prices over an extended period of time. These lines can then act as support or resistance if the price comes into contact with them again.

Each of the technical indicators above can help you advance your technical analysis and better understand price action, but its important to remember not to get bogged down and to choose only the indicators that work for you.

Overly complicating your approach with too many indicators can force traders to process too much information, resulting in ‘paralysis by analysis’. As a result, its best to keep it straightforward and only use a handful in accordance with the goals set out in your trading plan.

Price action is the study or analysis of price movement in the market. Traders use price action to form opinions and base decisions on trends, key price levels, and suitable risk management. Trend identification is frequently utilized as the initial step in price action trading. All other facets of price action indicators require a trend basis to begin price action analysis.

Characteristic price action chart:

Price Action as Your First Indicator

Technical analysis setups generally begin with price action as the initial form of evaluation. The first thing to remember when using an indicator is that it is a function of price action. The indicator itself is not the ultimate tool when it comes to trading, but rather comes in behind price action. Price action governs the information that the indicator will ultimately provide on the chart. As such, a trader must determine what price action is doing (i.e. the trend) before consulting the indicator for an entry signal. Once the trend is determined, the trader can then consult the indicator for an entry signal in the direction of the trend. Traders trade on the price movement of an instrument. Therefore, the focus is on the change in price as opposed to the change in indicator value. Some traders base trading decisions and analysis purely on price action whilst others prefer a combination of price action and technical indicators which serve as a support system.

Technical indicators are derivatives of price action - price action governs the information that indicators provide on the chart. These indicators are calculated using varying periodic price data which provide substantiation for entry, exit, and stop distance criteria. Trend identification is also important in market analysis to ascertain how the market is functioning on a holistic scale (time frame dependent).

USD/ZAR price action example:

The USD/ZAR chart above exhibits the symbiotic relationship between price action and technical indicators in an archetypal trade setup. The chart arrangement begins with price action by identifying the upward trend (blue line) which also serves as a support level in this instance. The addition of the moving average further confirms the short-term trend direction with the forex price being above the 20, 50, and 200 moving average lines.

Using the stochastic oscillator suggests the market is nearly in oversold territory which points towards further bullish/upward movement. Timing the entry would require keeping an eye on the stochastic as well as the price movement as it approaches the support (blue line). Once the price reaches this level, traders would look to enter into a long position with appropriate risk management.

Price Action and Technical Indicators: A Summary

Price action is a broad technical analysis technique that incorporates various trading strategies that traders apply to analyze the markets. Technical indicators work well in conjunction with price action to allow traders to formulate more accurate trade decisions.