2Bull Forex Blog

Most Forex retail traders will use some form of technical indicator in their trading careers. In this short article, I’m going to review the 4 most common types of technical indicators.

Trend Indicators

Trend indicators indicate the persistence of price movement in one direction over time. Trends can only occur in three directions: up, down or sideways. They are one of the most common indicators used by traders today. You may have heard the phrase “Trade with the trend”, and that’s how trend indicators are typically used.

The good thing about trend indicators is that they smooth out short-term price fluctuations (or “noise”), and enables a trader to focus on trading in the overall direction of where market prices are headed.

Volatility Indicators

Volatility is a general term used to describe the magnitude (or size) of market price fluctuations. Unlike trend indicators, volatility indicators don’t take into account the directional movement of market prices: you can have highly volatile fluctuations no matter the direction of the trend.

Support/Resistance Indicators

Support and resistance indicators describe the price levels at which market price action tend to reverse. In an uptrend for example, prices may tend to reverse downward at resistance levels. The opposite is true for support levels.

Support and resistance occurs due to the dynamic interaction between buyers and sellers.

Momentum Indicators

Momentum is a general term that describes how quickly prices move over a given time period. In essence, momentum indicators measure the strength (or weakness) of a trend. Thus, momentum indicators are often used in conjunction with trend indicators.

Momentum is typically largest at the beginning of a trend, and grows weaker and weaker until the trend eventually reverses.

The Parabolic SAR indicator was developed by J. Welles Wilder in 1976. It is often used to select trailing price stops and is commonly referred to as SAR (Stop And Reversal).

This indicator aims to signal the reversing of a trend, thus providing traders with a good tool for choosing trade exit points. The unique feature about the parabolic indicator is that it takes into account both the factors of time and changing prices. Most traders unfortunately focus mainly on prices and ignore the effects of the passage of time.

What Does The Parabolic SAR indicator look like?

Unlike most other indicators, the parabolic indicator is not a line on the trading chart. It is actually a series of dots that are located either above or below the chart candlesticks or bars. When prices are moving up, the parabolic dots are located below the candlesticks. When prices are moving down, they are located above the candlesticks.

How Effective Is The Parabolic SAR Indicator?

Although this indicator is pretty effective in identifying trend reversals, it works poorly in ranging (i.e. non-trending) markets. In ranging markets, you will find that this indicator will often give false reversal signals, and may cause you to prematurely enter or exit into trades.

The parabolic indicator is actually a very useful indicator to adopt in the Forex market, mainly because the Forex market often trends strongly. When market prices soar (or crashes) without a retracement or pullback, it’s quite hard for traders to choose a good stop-loss level when using other indicators. With the parabolic however, you can easily place your stops near to the parabolic “dots”.

The Fibonacci retracement indicator is a very popular tool among Forex traders, and it is based on a set of key numbers identified in 1175 by Leonardo Fibonacci, an Italian mathematician.

What Are Fibonacci Numbers?

The Fibonacci series is derived by first adding numbers as follows:

2+1 = 3
3+2 = 5
5+3 = 8
8+5 = 13
13+8 = 21

…and so on until infinity.

The next number is always calculated as the sum of the previous two numbers. However, these numbers themselves aren’t important. Rather, it is the ratio between these numbers that form the Fibonacci series.

If you take the first number (i.e. 3) and divide it by the next (i.e. 5), you’ll get an estimate of about 61.8%. This is the same as if you take 5 divided by 8, and so on. You’ll always get a ratio close to 61.8%. 61.8% is the first Fibonacci ratio.

The next Fibonacci ratio is derived by taking the ratio of the first number and third number. For example: 3/8, 5/13, 8/21 and so on. You will roughly get 38.2% this time. This is the second important Fibonacci ratio.

The third Fibonacci ratio is calculated by taking the ratio of the first number and fourth number. For example: 3/13, 5/21 and so on. You’ll get roughly 23.6%

How Do I Use Fibonacci Ratios In Forex Trading?

In technical chart analysis, Fibonacci levels are usually created by taking a chart peak and trough, and dividing the vertical distance by the key Fibonacci ratios. These graphical levels on the trading chart are important support/resistance areas.