A chart indicator is a statistical formula applied to the movement of a price - they’re a patent recipe designed to reveal more about what’s been going on and hopefully what’s more likely to happen in the future.

There sure are a lot of them, MACD/OsMA, Parabolic SAR, Williams’ Percent Range – and everyone has their own favorites. Too many to go through each of them here, but you’ll find individual blog posts on a lot of them if you search this site.

We’ll look through some of the simpler examples – not so much to say here’s a surefire chart indicator, more to show how an indicator can and should be used in analysis – at some point, if and when you get heavily into this forex business, you’ll need to sort through them and work out which you want to incorporate into your chart analysis toolbox. So, lets start at the very beginning with…

Simple Moving Averages

A simple moving average plots the average closing price of a currency pair for the last x time periods – so you might have a 20-day moving average on a daily chart, or a 12-hour moving average on a 1hour chart.
What a moving average does is smooth price fluctuations over time.

Even averages have a happy medium – too few time periods and it’s not much of an average – too many, and it’s overly affected by events that happened a relatively long time ago. With averaging, the more you smooth out the noise, the slower it is to signal movement in the price – the whole process is being ‘numbed’.

This chart has 3 simple moving averages calculated and plotted – as you can see, while the 5-period SMA follows the actual candlesticks relatively closely, the more the sample size is increased the more the curve is smoothed out.

Exponential Moving Averages

EMAs give more weight to the most recent periods. They’re designed to increase the relevance, since, after all, what’s recently happened is that much more important than what’s gone before.
The exponential part is in the scale of weighting applied to each period – no need to worry about the math here.

Simple versus Exponential

A short period EMA will be more likely to show a trend early on – which is often what you want, get into a moving market early and you’re increasing your yield of pips. But with the inevitable downside, this sensitivity will necessarily lead to more false signals being generated – not what you want. Short EMAs will always respond, even to spikes that go away as quickly as they came.

A long period SMA will do the opposite – smoothing things out to give a clearer picture for the longer-term. Not so useful for catching a shorter trend, but good for getting the strategic information out of a chart.

Let’s move on to some of other things that can be done with moving averages and encounter forex oscillators, with 8. Moving Average Convergence/Divergence →