Forex Indicators Explained: A Brief Overview PDF Print E-mail
Written by Cedric Welsch   
Thursday, 16 September 2010 19:10
Below we provide a composite of forex indicators explained. An indicator, in general, is one that signals a change. In forex world, it means currency fluctuations. Currency fluctuations are affected by several factors. To monitor or predict these changes, two broad categories of indicators are used: technical and economic. A technical approach is one that uses price history changes and chart patterns. Some examples would be stochastic oscillator, moving average convergence divergence or MACD, and RSI or relative strength index. Economic indicators are, just that, based on economic data. The common economic measurements are GDP growth, unemployment, CPI, retail sales, and industrial production.
by CedricWelsch


Below we provide a composite of forex indicators explained. An indicator, in general, is one that signals a change. In forex world, it means currency fluctuations. Currency fluctuations are affected by several factors. To monitor or predict these changes, two broad categories of indicators are used: technical and economic. A technical approach is one that uses price history changes and chart patterns. Some examples would be stochastic oscillator, moving average convergence divergence or MACD, and RSI or relative strength index. Economic indicators are, just that, based on economic data. The common economic measurements are GDP growth, unemployment, CPI, retail sales, and industrial production.

Let us take a deeper look at some of the technical indicators first. The Relative Strength Index is a normalized ratio of positive moves versus negative ones. This normalization results in an index range of zero to one hundred. If this RSI shows a value in excess of seventy then conditions are considered to be overbought relative to expectations. Similarly, if the ratio is below thirty then conditions would be considered oversold.

Another indicator, the MACD, can signal a change in direction over a specific window of time measured. This moving average convergence divergence calculates the difference between two exponential moving averages like a two hundred day versus a fifty day. Graphing this difference versus the moving average of the difference will provide cross over points that signal a change in direction.

The stochastic oscillator is a very good gauge for the sustainability of a trend whether it is positive or negative. This methodology calculates percentage values based on closing prices. In the case of an uptrend, the closing prices are focused on the upper end of a trading range, and in a downtrend they are near the bottom end. The concluding result is a band of lines which delineates an uptrend or downtrend. Any variation away from these bands would result in a trend change signal.

For forex indicators explained, one needs to include economic factors. GDP growth is the most prevalent economic indicator. It reflects the change in the gross domestic product, or an economy's total value of its output which is the goods and services it produces. GDP is measured on an annual, quarterly, and sometimes monthly basis. Although GDP growth shows the change in economic output, it should not be viewed in isolation.

Another indicator that measures productivity and its capacity is industrial production. This metric reflects the manufacturing growth of an economy as well as the amount of used capacity. An increase in unused capacity can be an indication of slowing economic growth and, hence, a weaker currency indicator.

Two very important economic indicators for economic strength are unemployment and housing statistics. Growing unemployment or a large unused labor force can result in geopolitical instability and also become an economic burden without the infrastructure to support an unproductive population. Although there cannot be one hundred percent employment, there is a level of optimum unemployment which can be supported while still producing economic growth.

As stated earlier, unemployment affects consumption. However, it is not a direct correlation. A country can have a relatively healthy unemployment rate with lower consumption. The population can opt to save versus spend. Hence, retail sales are a good indicator of economic sentiment. The more optimistic one is about the future the more likely one is to spend.

Lastly, GDP and retail prices are affected by inflation. The value of goods and services can vary depending on input costs. To gauge inflation, the consumer price index or CPI is used. This index measures the change in value of a set group of goods and services. This index, along with the PPI or producer price index, can help determine the profit or surplus of an economy. A composite understanding of these indicators along with the technical signal previously discussed, provides a good forex indicators explained overview.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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