Forex Signals, also known as ‘technical indicators’, are data points used in the prediction of currency movements. This article will examine three of the most popular forex signals in use today.
Signal #1: Relative Strength Index (RSI)
The RSI indicator measures the ratio of upwards to downwards movements on the market, and the result is normalized to a range between 0-100.
.When an instrument, such as a currency pair, moves to 70 or greater on the RSI, the instrument is said to be ‘over bought’. Likewise, when a currency pair moves to 30 or below on the RSI, it is said to be ‘over sold’.
So, the Relative Strength Index is essentially a broad measurement of market demand for a given currency. Keep in mind, however, that spikes and drops may occur for any number of reasons, and do not necessarily indicate the development of a trend.
Relative Strength is useful in spot trading and some mid-range strategies, but it is not the only indicator to watch, particularly if you intend to employ long-range holding strategies.
Signal #2: Stochastic Oscillators (SO)
Charts derived from Stochastic oscillations are also used to indicate ‘over bought’ and ‘over sold’ conditions for currencies on the exchange market. These conditions are typically expressed on a percentage scale from 0-100%.
The S.O. scale method was derived from historical observation of market phenomena centered around closing trades. It was observed that – during the period towards closing – both the upwards and downwards trends in conditions tend to congregate towards the extreme ends of the scale.
These Buying and Selling conditions are charted using two lines: %K and %D. A divergence between these lines against the price action of a currency is a strong trading signal.
Signal #3: Moving Average Convergence Divergence (MACD)
This signal plots two lines of movement: the MACD line, and the signal/trigger line.
The MACD line represents the difference between two, exponential moving averages and the signal line — which is the exponential moving average of that difference. This is a tricky concept to grasp, so let’s look at MACD as an equation.
We’ll let each exponential moving average be represented by EMA-0, EMA-1, EMA-2, etc..
The Signal Line, then, is equal to: EMA (EMA0 – EMA-1… + …EMA-2 – EMA-3…+..) and so on.
Basically, the signal line is reflecting the exponential moving average of moving averages over time, such that:
Signal Line = EMA (EMA-0 minus EMA-1), and..
The MACD line = (EMA0-EMA1) – signal line.
The MACD and Signal Lines are charted around a ‘Zero’ line, the extreme limits of which represent ‘slow MACD movement’ and ‘fast MACD movement’, respectively. Whenever the MACD and Signal Lines cross, it is an indicator that a change in trend is likely.
This wraps up our look at three of the most popular Forex signals. They are by no means the only ones. Some of the other, more technically complex signals includes indicators derived from Gann numbers and Elliot Wave theory.
The good news is that you don’t have to be a math whiz to make use of these indicators, as there are plenty of commercial software solutions on the market.
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