Lesson #40 Finding Currency Trends Using Indicators

There are two types of indicators: the leading and the lagging indicators.

Leading indicators are used to anticipate future currency prices but are less accurate. Leading indicators often give misleading signals and using this type of indicator does not mean that trading is profitable because the entire trend is captured in every single time, it may be the other way around.

Lagging indicator, on the other hand, is an indicator based on historical mathematical data. It has the ability to confirm the occurrence of a pattern or if the pattern will materialize and are not prone to false signals. It only gives green lights after the prices clearly formed a movement.

Predicting Future Price Movements

Oscillators are leading indicators which give a purchase signal before the new trend or reversal occurs. This type of indicator indicates changes prior the price changes and as such, predicting the future price movements.

It is the data that moves to and pro between two points (points A and B) and land somewhere between these points. More specifically, it approves the buy position when the indicator reaches the base of downward curve and then starts accelerating; a signal for sell position when the indicator arrived at the peak of the upward curve and then starts diminishing.

Foreign exchange traders applying the technical analysis often refer to oscillators when the charts they are studying are stagnant in any direction, making oscillators more advantageous in non-trending charts.

Determining Actual Price Trend

Momentum lagging indicator is an indicator that gives the green light after the trend has started. They do not forecast the currency price activity but they confirm the price trend.

Momentum is the pace of acceleration at which currency prices move at a certain time frame. It determines the strengths and weaknesses of a movement as it progresses.

At the beginning of the trend, momentum is at its highest and falls to its lowest level at the movement’s turning point. Any deviation in the direction of price and momentum means a sign of weakness: If the maximum price level occurs with weak momentum, it indicates that the movement ends in that direction. On the other hand, if the momentum has a strong trend and prices are flat, it is indicative of a potential change in price direction.

Oscillator and momentum can compliment one another, however, they can be conflicting with each other. The potential pitfall of each indicator should be taken into consideration and fully understood.