FOREX Indicators and Oscillators
Beyond charting are various market indicators -- calculations using the primary information of open, high, low, or close. Indicators can also be charted or graphed. Buy and sell signals and complete systems can be generated from a battery of indicators. The most popular indicators are: relative strength, moving averages, oscillators or momentum analysis (actually a superset of relative strength), and Bollinger bands.
Tip: Traders are fascinated by indicators. Numbers bring a sense of certainty. Be sure you know what an indicator is actually measuring before using it.
Relative Strength IndicatorThe relative strength indicator (RSI) shows whether a currency is overbought or oversold. Overbought indicates an upward market trend, because the financial operators are buying a currency in the hope of further rate increases. Sooner or later saturation will occur because the financial operators have already created a long position. They show restraint in making additional purchases and trying to make a profit. The profits made can quickly lead to a change in the trend or at least a consolidation.
Oversold indicates that the market is showing downward trend conditions, because the operators are selling a currency in the hope of further rate falls. Over time, saturation will occur because the financial operators have created short positions. They then limit their sales and try to compensate for the short positions with profits. This can rapidly lead to a change in the trend.
You cannot determine directly whether the market is overbought or oversold. This would suppose that you knew all of the foreign exchange positions of all the financial operators. Experience shows that only speculative buying, which leads to an overbought situation, makes rapid rate rallies possible.
The RSI is a numerical indication of price fluctuations over a given period; it is expressed as a percentage.
[caption id="attachment_13111" align="aligncenter" width="513"] Calculating RSI[/caption]
An RSI between 30 percent and 70 percent is considered neutral. Below 25 percent indicates an oversold market; over 75 percent indicates an overbought market. The RSI should never be considered alone but in conjunction with other indicators and charts. Moreover, its interpretation depends largely on the period studied. The example in Table is nine days. An RSI over 25 days would show, given a steady evolution of rates, fewer fluctuations. The advantage of obtaining more rapid signals for selling and buying (by using a smaller number of days) is counterbalanced by a greater risk of receiving the unconfirmed signals.