Countless indicators come to support technical analysts. They are essentially mathematical formulas applied to price data. It is important for every trader to understand the way indicators are calculated in order to properly assess the possibilities and limitations of the signals they generate.

Indicators can be conventionally categorized as trend, momentum, volatility, and volume indicators.

“Trend followers”, as the name suggests, are suitable for traders whose strategy is related to identifying the trend and getting the most out of it. Such indicators are, for example, moving averages.

Momentum indicators are oscillators by their nature. Most of them define an upper and lower boundary value. Crossing above the upper value signals entering overbought territory, while crossing the lower ones is an oversold sign. The potential to identify turning points and the strength of a trend brings them widespread popularity. The most commonly used momentum indicators are Stochastics, CCI (Commodity Channel Index) and RSI (Relative Strength Index).

Volatility indicators are based on risk metrics as standard deviation. They capture sharper than usual price fluctuations. These situations can provide a trading opportunity and indicators such as Bollinger Bands seek to signal it.

Volume indicators reflect data from actual trading volumes. This offers an alternative approach to market analysis based on the actions of the traders themselves. Examples include volumes, accumulation/distribution, on balance volume.

Indicators are used as a complementary or primary method of technical analysis. Their genesis determines in what environment they would be most effective. In this sense, at a particular point in time, they can give signals opposite to each other. For this reason, traders are required to find both the right indicators for their strategy and the right setup parameters.

The assumption that a larger number of indicators would further refine the investment decision is wrong. Typically, experienced traders limit themselves to 2-4 indicators.

In the following chapters, we will present some of the most commonly used indicators in foreign exchange trading.

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