Technical Indicators – Types

As stated above technical indicators are a manipulation of the historical and current data to help the analyst arrive at a trend, entry and exit points in a more efficient manner. There are many types of indicators and different brokers will offer a different package of them. We will discuss the major types and most popular indicators.

There are five main groups of technical indicators and they are:

  1. Trend Indicators: These indicators are used to smooth out price variations in order to show the overall movement or trend in a particular instrument. There are two variations in this type of indicator:
    Simple trend lines, theses are manual trend lines created by joining the two tops or two bottoms periods within a chart to form a trend pattern. The most common types of trend patterns formed are support and resistance lines, rising or falling tunnels, and rising, falling or straight triangles.
    The second type of trend indicators are automatic indicators that smooth out the past period of the chart in question, the most common of these are Moving Averages (see below for a more detailed explanation).
  2. Strength Indicators: This type of indicator is rarely seen in the FX Markets since it is based on volume. The FX market is an OTC market and hence specific volumes at any one time are impossible to ascertain. The most popular indicator of this type is Volume; however it is more appropriate in regulated markets such as futures.
  3. Volatility: Volatility measures the fluctuations over time and is an indicator of “quite” as opposed to “volatile” markets. These indicators are often used to select support and resistance lines. The most common indicator of this type is the Bollinger Bands”. (see below for a more detailed explanation)
  4. Cycle: Cycle indicators attempt to pick up repetitious patterns. Once again more popular in other financial markets such as the futures market. The most popular Cycle indicator is the Elliot Wave.
  5. Momentum or Oscillators: These indicators are very popular in the FX Markets; they indicate the speed of price changes over a period of time. In this way the Momentum indicators determine the strength or the weakness of a trend over time. Momentum or the speed of price changes is strongest at the beginning of a trend and tends to slow down as it nears turning points of a trend. Any divergence of directions in price and momentum is a warning of weakness or the end of a trend; if price extremes occur with weak momentum, it signals an end of movement in that direction. If momentum is trending strongly and prices aren’t moving, it is considered as a signal for the potential change in price direction. The most popular momentum indicators are the Stochastic, RSI and MACD. (see below for a more detailed explanation).