1 August, 2014
If you frequent forex forums, this word will undoubtedly haunt you. Indicators. Everyone's talking about them, but what are they? What do they mean? And more importantly, how can they help you make better decisions when you trade?
The dictionary defines indicators as "a pointing or directing device, as a pointer on the dial of an instrument to show pressure, temperature, speed, volume or the like". In forex, an indicator is an equation that gathers past data in orderto provide some sort of insight as to where the market may move.
I'm going to be going in alphabetical order listing all of the popular indicators, what they represent, and how traders use them to estimate future market movement.
Acceleration Deceleration Oscillator (AC)
This indicator is comprised of the nought line (featured as a blue line in the Rumus platform), the AC Red and the AC Green. The point of this indicator is to measure the acceleration and deceleration of the driving force of the market.
How do traders read this indicator?
Open Rumus and drag the indicator Acceleration Deceleration Oscillator (AC) onto a chart. Look at the vertical lines. When you see that these vertical lines are above the nought line (blue) and there are two green bars next to one another, this is an indication to buy. If you see that the lines are below the line and there are two red bars next to one another, this is an indication to sell.
Created by Marc Chaikin, this volume indicator measures the supply and demand of a currency by calculating the amount of people going long or short on a trade.
The formula for the Accumulation/Distribution indicator is:
Acc/Dist = ((Close – Low) – (High – Close)) / (High – Low) * Period's volume
How to read it:
When the indicator rises, this signifies a period of buying, where many traders are speculated to be buying this specific currency. A decrease in the indicator signifies a period where traders are selling the pair.
In the example above, we can speculate that many traders are longing the GBP/USD, as the Accumulation/Distribution line appears to be at a 15 day high. If you had gone long, as the indicator had told you, you would have found that the GBP/USD topped off at 1.6859 on November 16th!! That's a 300 pip profit!