If you have journeyed across an ocean, you will be in a better position to appreciate what forex indicators are. The ocean is a vast stretch of water and travelling across it entails journeying through a seemingly endless mass of churning often turbulent water underneath and an infinite sky above. Without navigational aids, you’d easily get lost in this vast stretch of nothingness. But that’s the easy part; the worst part is when mishaps occur as they are likely to happen such as running aground on shallow waters, getting in the way of stormy seas and tossed around by giant waves, or in the worst case scenario, getting smashed into pieces after ramming a floating iceberg. Forex indicators are essentially your navigational aids to sail through the rough and tumble waters of the foreign currency market.
Forex indicators are basically a collection of technical indicators used to track and ultimately forecast the direction of prices (in this case the rates of exchange of different currency pairs). They are tools used to study past market data, particularly the price and volume, in order to forecast future price directions and trends. They belong to a vast school of thought called technical analysis which is founded on the belief that given the same market conditions and circumstances, traders are likely to behave in much the same way in the past and pushing the prices in exactly the same fashion and direction.
Technical analysts believe that prices move in trends and that the market discounts everything. They hang on to the belief that ‘history repeats itself’ expecting traders to react and push the prices in the like manner in the past if given the same market conditions and fundamentals. For over 100 years, technical analysts the world over have been trying to discover the proverbial Holy Grail that will reap open the road to profits. They have studied past price movements and trading volumes charting them in different ways, and using mathematical methods to discern some semblance of recurring price patterns that may give them a clue to future price movements.
This has resulted in a flurry of charting techniques and a vast array of technical indicators from the simple trend lines, support and resistance lines to the more complicated studies based on stochastic. Technical analytics from the orient like the now infamous Japanese Candlestick charting techniques and quite recently the Ichimoku Kinko Hyo Cloud Charting technique, have also joined the already over populated family of technical indicators. The gamut of available technical indicators is simply overwhelming especially to upstart traders. It includes trend following indicators, momentum indicators, volatility indicators, volume indicators, cycle indicators, and other special indicators that make use of advanced mathematical analytics.
The theoretical foundation of forex indicators and all the other technical indicators are based on the belief that markets are rational. However, the stock market crash in the late 2000 punched holes into this belief and gave rise to the Efficient Market Theory which basically states that markets including the foreign exchange markets will always be right while anyone else can be wrong. In essence, this emerging theory simply states that there can never be a Holy Grail for a market indicator and future price movements can never be predicted with great accuracy using past prices.
Does this mean forex indicators and other technical indicators are rendered useless by the new market hypothesis? My categorical answer is no. The fact remains that that these indicators are still being used by a lot of forex traders. This makes it imperative for us to watch and study these indicators. The sheer number of traders using them can at the very least impact price movements. The secret is not to study forex indicators with the view of being technical analysts yourselves. The goal is to know and understand which of these indicators are popularly and commonly used by the greater majority of traders. At the very least, we will be able to predict price directions to a certain extent.