July 27, 2009
July 19, 2009
Indicators
Moving averages: Moving averages smooth out the peaks and troughs of the exchange rate cycle over a rolling period and indicate the presence of a trend.
There are two main types of moving averages:
Simple: Where past and present data are assumed to be of equal importance and are weighted equally.
Weighted: Where current data is considered more important than past data and is weighted more heavily. The weighting factor takes the form of a “smoothing constant” that increases exponentially over time.
If prices lie below two or more moving averages, this is taken as a bearish signal, and vice versa.
Stochastic oscillators: Stochastic oscillators are momentum indicators that purport to tell you when to buy or sell. They are composed of two elements:
- A “%K” line that measures the difference between the most recent closing price and the deepest trough as a percentage of the difference between the highest peak and the deepest trough, measured over a given period (e.g. 14 days).
- A “%D” line that tracks the three-period (e.g. day) moving average of %K.
A rise in %K over %D is interpreted as a buy signal, and vice versa.
Currency is considered overbought when the oscillator touches 80. An oscillator below 20 is considered to indicate an oversold currency.
