[DavidWaring]

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Practice Using Technical Indicators with a Free FXCM Forex Demo and Charts



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In our last lesson we finished up our series on chart patterns with a look at strategies which can be used to trade triangle chart patterns. In this lesson we are going to start a new series on technical indicators with an overview of what technical indicators are, and how traders use them to help pick their entry and exit points.

A technical indicator is a mathematical formula which is derived from the price action of a financial instrument and/or the volume traded. The results of these formulas are commonly displayed in graphical form above or below a financial instruments price chart, and are used to help predict future price movement. When used in combination with other forms of technical analysis, such as the chart patterns we have learned so far, technical indicators can be a powerful compliment which traders can use to assist in their trading decisions.

Technical indicators can be broken down into two main categories which are leading and lagging indicators. As their name suggests, leading indicators are created to try and predict future price movement. Because most leading indicators are trying to gauge price momentum from relatively recent price action, these indicators tend to generate frequent buy and sell signals and are therefore normally used in ranging markets. While some traders like the opportunity to enter more trades, it is important to keep in mind that the potential for false signals with leading indicators is high.

Lagging indicators on the other hand are created to give a picture of where the market has been, and therefore where it is likely to continue to go. As this is the case these indicators are normally used by traders looking to trade with the trend, and offer little value in ranging markets. Secondly because these indicators are designed to catch and stay with the trend for as long as possible, they generate less trading signals than leading indicators. This is often seen as a positive from the standpoint of generating less false trading signals and also a negative as this also means that they normally get you into a move later than a leading indicator.

One of the biggest issues when deciding how and when to use a particular indicator is determining how sensitive to make the indicator to price movements. The more sensitive the indicator the earlier you will catch the move, however the more false signals that will be given. Conversely the less sensitive the indicator the less false signals but the later you will get into the move.

That completes this lesson. You should now have a good understanding of what a technical indicator is and how they are used in trading. In the lessons that come we will look at some of the more popular indicators, starting in the next lesson with moving averages, as well as how to use these indicators in your trading, so we hope to see you in those lessons.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

Links to Help You Learn More About Technical Indicators

Introduction to Technical Indicators and Oscillators - StockCharts.com
Technical analysis - Wikipedia, the free encyclopedia
Technical Indicators — Technical Analysis
Incredible Charts: Indicators

[rds1933]

Many times price movement is event driven. In such a case, variation in price is a response to the degree of perceived threat or opportunity. Crisis arising out of Sub-prime Lending is the case in point. In the Indian market, on January 22, 2008, there was massive fall in the price indices of the two national stock exchanges. The vertical bar of the drop-down can serve as a good staff, if a flag forms (In fact, a flag is in the process of formation!). In as much as the sudden drop was result of the panic generated by the negative perception and the prices moved up the next day quite substantially, can the dropping-bar be treated as the flag-staff, in case the formation is completed? If so, would the closing price of the bar, be a valid point to measure the drop from the top of the flag? If there is a break out upwards, can one expect prices to move to a height corresponding to the low staff base, in the back-drop of continued sub-prime crisis in US, negative local conditions, such as, low liquidity, higher rates of interest, inflation, impending general election and many other accompanying conditions that are unhelpful for market growth? In such a condition, would it be valid to go by technical analysis as compared to fundamental considerations?

Further, if the lower end of the flag touches or crosses the low of the staff, would such a formation still be treated as Flag?

[David Waring]

Hi RDS1933,

Thanks for the comment and welcome to the community.

What I think most people would agree a flag formation is saying from a market psychology standpoint is that the market has just had a big push in one direction and will thus need a period of consolidation for its next move. If the previous move that formed the flag is a push up then it is expected that the market will continue to push higher after it "takes a bit to catch its breath" which forms the consolidation. As such traders will look for a breakout to the upside to confirm this.

So in answer to the first part of your question (and I could see how others may disagree here and would love to hear from those that do) is that yes that push up can be considered the flagpole part of the formation because the market did have a big push up. Granted that big push up was off of panic selling but it was a big push up nonetheless. So I would say that the flag is formed by the push up not the push down.

As that is my opinion if I were looking at the pattern I would say yes you can use the low and then the high for the bar that forms the flagpole to measure the move.

As far as your other questions it is really a matter of personal preference whether you trade based on technicals, fundamentals, or a mixture of the two. There are profitable traders in each category there so in my opinion that is a decision each trader should make for themselves.

Hope that helps and if there are any other opinions on this I would love to hear them.

Best Regards,

Dave

[rds1933]

Hi, Dave,

It was so nice of you to have responded to my query. I felt a triffle guilty for not having thanked you for the invaluable service being rendered by you to educate traders/ investors like me through your basic course in technicals as also other aspects including the futures. It was surely non-civil on my part not to have expressed my feeling of gratitude. I do this now and do this profusely. And, thanks for extending welcome for joining the community,

It appears, the query raised in the second paragraph - whether a flag formation remains classified as one even when the lower free end on the right touches or crosses the low of the flagpole - could not be touched upon in your mail. Shall be grateful, if you could do that now.

[David Waring]

Originally Posted by rds1933

Hi, Dave,

It was so nice of you to have responded to my query. I felt a triffle guilty for not having thanked you for the invaluable service being rendered by you to educate traders/ investors like me through your basic course in technicals as also other aspects including the futures. It was surely non-civil on my part not to have expressed my feeling of gratitude. I do this now and do this profusely. And, thanks for extending welcome for joining the community,

It appears, the query raised in the second paragraph - whether a flag formation remains classified as one even when the lower free end on the right touches or crosses the low of the flagpole - could not be touched upon in your mail. Shall be grateful, if you could do that now.

Hi rds1933,

No worries I am glad you like the site and appreciate your comments.

As most traders identify a flag pattern as a quick run up and then a consolidation I would not think that when price touches or breaches the bottom of the flagpole that this would still be considered a flag. My reasoning here is that at this point it is no longer a consolidation but a retracement of the previous move which formed the flagpole.

If there are other thoughts on this please feel free to post them below.

Best Regards,
Dave

[rds1933]

Thanks, Dave