The Momentum Indicator measures the rate of change or speed of price movement of a certain financial instrument.
Relative Strength Index (RSI)
Signals if an instrument is being overbought or oversold, by measuring the velocity and the magnitude of price movements.The Relative strength index (RSI) indicator is the first in the group of momentum indicators next to the Williams %R (Williams Percent Range) and the Stochastic, that serves the same basic purpose, but through slightly varying methods. Momentum is nothing else than the rate of price change.
What does RSI do? It compares the closing prices of the current and previous candles for the up and down trends. The result is turned into EMA or SMA (Simple Moving Average) in some cases and then evaluates the relation of the uptrend EMA to the downtrend EMA.
Then it is calculated how the uptrend EMA relates to the downtrend EMA when oscillated on a 1 to 100 scale. The bigger the difference between today and yesterday - the stronger the momentum.
If every future close signal is higher than the previous one, the RSI will be oscillating upward. As soon as it surpasses the threshold of 80, the sell signal is produced.
If the price makes a higher high, while the RSI only makes a lower high, a bearish signal is generated and vice versa.
Helps to identify overbought and oversold areas through measuring momentum. Evaluates how close the closing price was to the price range.
During the uptrend, the price should be closing near the highs of the trading range and near the lows during a downtrend. The Stochastic Oscillator is plotted in a 0 to 100 corridor, with basically the same 80/20 overbought/oversold thresholds.
The Williams %R compares today's closing price to the highest price in the past, and in relation to the average of the high and low in the past. In all other respects, it functions like the RSI and the Stochastic.
They measure the changes in market prices over a specified period of time. The faster prices change, the higher is the volatility.
Average True Range (ATR)
Measures market volatility by decomposing the entire range of an asset price for the period.
Range = Today's high - Today's low
The true range extends it to yesterday's closing price if it was outside of today's range. The Average True Range Indicator is an EMA of the true range.
ATR is formed out of the greater of the following:
- The current high minus the current low
- The absolute value of the current high less than the previous close
- The absolute value of the current low less than the previous close
The bigger the price difference between one of the above, the higher the ATR goes, and the higher is the volatility on the market. ATR can be used when adjusting trading stops.
Uses an SMA or an EMA, and then envelopes it by two standard deviation lines.
Bollinger Bands is another volatility indicator that creates a dynamic corridor for the price to bounce in. According to Mr Bollinger idea, prices are higher near the upper deviation line and lower at the lower deviation line, which hints at a turnaround.
Following Mr Bollinger's idea, prices are high when near the upper deviation line, and low at the lower deviation line.
A precise estimation of the spot Forex market volume is impossible in contrast to stocks, Forex futures, and commodities. The problem is that a single clearing location to recalculate volumes does not exist because Forex spot is traded over-the-counter (OTC). The trading volume available at a certain platform depends on the broker's own data stream. Those numbers bear no relation to the total worldwide trading volume. Nevertheless, some traders still use volume indicators in trading and some even benefit on it.
On-Balance Volume (OBV Indicator)
Measures increase/decrease in the volume of a traded instrument in relation to its price.
If a total daily volume has increased compared to the previous day, it is assigned a positive number. If the total volume has decreased since the previous day, it is supposed negative. When prices go strongly in one direction, so goes OBV. A divergence between the price and the OBV indicates a weakness in the market move.
If while further researching the wide range of technical indicators you meet many similarities among indicators mentioned above and the new ones, compliment yourself. That means you have not only grasped the mechanical execution of the generated trading signals but also comprehended their logic and market application. Improve your trading experience with our free demo account.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.