Forex trading Indicators, are an important part of technical analysis, in this article we will introduce tools which when applied properly can liberate us from having to constantly observe currency rate fluctuations.
Momentum Indicators or Trend Following
Overall, there are two types of indicators. First there are the so-called indicators of "momentum" or "trend following."These indicators are rather unique as they give you delayed signals. More clearly, the exchange rate will begin its movement and then the indicator will give you the signal. On the other hand, indicators called "oscillators", provide you with signals in advance, meaning before rates begin their movement.
Why are there indicators giving delayed signals, while others giving in advance?
The Difference Between Oscillators and Trending Indicators
With experience you quickly realize that oscillators give many false signals. However, when the signal is correct, you the chances of generate substantial gains are very high. Contrary to this the trend following indicators will give fewer false signals; however the gains will be smaller, since the current trend has already announced before the onset of the signal. Let us look at these different types of indicators in detail.
We must first understand what these indicators actually want to show us. You should know that through the incoherent movements exposed by graphics, there are two types of configurations that should interest us. The first is the trend, i.e. the exchange rate is clearly moving in one direction, for this reason we employ trend following indicators. The second is the one that could be described as cyclical, i.e. that prices move broadly in ranks without a clear trend. In this situation the oscillators will give optimal signals.
The basic principle of oscillators is that they consider that the exchange rates have a point of balance. When the exchange rate is too far away from that point they trace it to return to this balance.
Trending Indicators Contrary to the oscillators, these indicators are used during clear trend phases. It is not helpful to rely on such indicators in market range conditions. Indeed we must first understand what the purpose of these indicators is. They are typically used to filter out the movements and locate s trend. It is common practice to utilize them together with another filter to a obtain an entry point.
The best known of indicators to monitor trends continues to be the moving average (also called rolling average in statistics). This indicator is applied directly to the exchange rate depending on the time and allows to know the basic movement of the market.
In conclusion, we need to stress the fact that that there are really no type of indicator which is better than the other. Oscillators are very different to trend following indicators and they definitely each have their strengths and weaknesses. Therefore, we can compare oscillators between them, but it is useless to compare them with momentum indicators, it would be like comparing chart patterns with the Fibonacci retracement.