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Forex Indicators

In this section we examine the some of the most common technical indicators used in the forex market. While there seems to be an underground "naked chart" movement going on amongst retail forex traders, meaning NO indicators except for the naked eye and a chart, there are still a number of ways to use these indicators in order to improve your trading. You may not subscribe to this idea, and certainly all indicators have their weaknesses, but it is important to understand the indicators before accepting or rejecting any trade signals based on them.

Momentum Indicator

Indicator Name: Momentum Indicator

Indicator Type: Unbounded Oscillator

Description: The momentum oscillator has been in use for a long time. It is not known where and when exactly it originated. Its combination of simplicity and usefulness makes it quite likely that several early market technicians developed the idea independently of each other. Your charting package may have a slight variation on the original formula, but it will still be used in the same way. It should be noted that the momentum oscillator is a leading indicator, meaning that it gives signals before price action confirms them.

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Indicator Name: Exponential Moving Average, Exponentially Weighted Moving Average, or simply EMA

Indicator Type: Moving Average

Description: Along with the simple moving average, the exponential moving average we are going to discuss here is one of the most commonly used technical chart indicators across all financial markets. The forex is no exception. The main reason that early chartists developed the exponential moving average was that they felt the SMA was too reliant on old data, and too slow to react to recent price action, so they devised a way to give the most weight to the most recent price action, and to let the weight taper off as you move back through time on the chart. There are two slightly different methods one can use to calculate an EMA, although it is fairly easy to convert from one form to the other.

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Indicator Name: Simple Moving Average, or SMA

Indicator Type: Moving Average

Description: There are several different types of moving averages (MAs) in use by forex traders. In fact, moving averages are the most common technical indicator across all financial markets, including the forex.They are called "moving" because each new chart period is included in the calculation, while the oldest period is discarded. This has the effect of the average moving along as time passes and the chart develops.

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Indicator Name: Relative Strength Index, or RSI

Indicator Type: Bounded Oscillator

Description: The Relative Strength Index is one of the most common indicators in use today. It is difficult to find a chartist that doesn't have RSI pasted to the bottom of his or her chart. It was developed in 1978 in order to resolve two specific problems with momentum indicators of the time. The first problem was that momentum lines often became erratic due to sharp changes being dropped out of the calculation as time passed. For example if we were constructing a 14 day momentum line, and there was a sharp decline 14 days ago, then that value would contribute a significant sum to our momentum calculation, until the 15th day after it, when it would suddenly and completely disappear from the calculations. This would then cause the momentum value to rise sharply on the 15th day after the sharp decline. There was an obvious need to smooth the momentum. The other problem was that there was a need to get the indicator to display a consistent range so that different instruments and timeframes could be compared.

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