Forex Chart Indicators Explained

Let's dive right in with a quick definition of what a Forex chart indicator is. An indicator is a derivative of price, time, and/or volume. One of the most basic examples of an indicator is the simple moving average. A moving average can be abbreviated as MA. One MA that is commonly used is the 200 day MA. The calculation of this indicator is very simple. We would take the closing prices of the last 200 days of the currency pair we are interested in and divide it by 200 to come up with the average.

Indicators are plotted on a Forex chart along with the prices. An "indicator" gets its name because it is designed to "indicate" or point out a particular area of Forex market interest. In our moving average example when prices move above the moving average that "indicates" an up trend. When prices move below the moving average that "indicates" a downtrend. Indicators can be thought of as visual aids that allow us to more easily see trends, counter trends, and consolidation (sideways market movement).

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Forex traders are able to vary the parameters of various chart indicators in order to better visualize potential trades. Moving averages can range from 1 to infinity and any point in between. The moving average and other indicators can also be used on virtually any chart time frame such as one minute, five minute, fifteen minute, one hour, four hour, etc. The length of a moving average determines its sensitivity to Forex currency pair movements. A five day average, for instance, will trade much more frequently than a 100 day moving average.

Different types of indicators are plotted differently on a Forex chart. Moving averages are plotted on the same scale as the currency pair's prices themselves. Others such as the stochastic oscillator are plotted on their own scale. The stochastic must be plotted on its own scale because its values range from a low of zero to a high of 100. The stochastic is called an oscillator because its range "oscillates" between one and 100. The stochastic indicator is typically interpreted as follows:

If the stochastic is above 80 the market is thought to be "overbought". Some traders may look at this as a time to either think about getting out of their long positions or to think about entering a short position.

If the stochastic is below 20 the market is thought to be "oversold". Traders may interpret this as either a time to think about getting out of their short positions or getting into a long position.

These are just a few simplified examples of Forex chart indicators. Contrary to what many would have you believe trading with indicators can be extremely profitable when done properly.

Forex Chart Indicators Explained

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