Forex Probability Indicator
To an untrained eye, it may appear the price on a foreign exchange (Forex) price chart moves up and down randomly. Price and trading volume, however, provide clues about supply and demand for currency pairs. Chart indicators are tools used by Forex chart analysts that help measure the probabilities of future price movement.
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Oscillators
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Oscillating indicators, such as stochastics and the relative strength indicator, help chart analysts determine whether the current price is relatively overbought or oversold. Oscillators usually are plotted at the bottom of a price chart as a line that varies between 0 and 100. Generally, when an oscillator is above 80, the price is considered overbought, indicating a reversal lower may be likely. When it is below 20, the price is oversold and is likely to reverse higher.
Moving Averages
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Moving average lines are calculated based on the average price over a certain period of days. A 200-day average, for example, represents the average price over the past 200 days. Moving averages are plotted directly on the price chart. Buyers may support the price when it reaches certain moving averages. For example, when the price pulls back to the 50-day average, buyers often buy at that level, causing the price to rise once again.
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Price Channels
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Price channels, such as Bollinger Bands and Keltner Channels, are developed much like moving averages. A moving average is just one line. A price channel, on the other hand, is plotted as two lines that represent the average price range over a given period. The top line, or band, represents the highest average price reached in a given time period, while the lower band represents the lowest average price. Prices near the top or bottom bands are prone to reverse lower or higher.
Money Flow and On Balance Volume
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Money flow and on balance volume indicators also are oscillating indicators. Like the stochastic, they are plotted at the bottom of a price chart between 0 and 100. These types of indicators measure the amount of buying or selling pressure the price of the currency pair may be under. Typically, these indicators are used for confirmation. For example, if the price is rising and the money flow indicator is also rising, it confirms that there is steady buying pressure, which can lead to a sustained move higher into the future.
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References
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Forex Probability Indicator.
