Stochastic Oscillator

Developed by George C. Lane in the late 1950sd, The Stochastic Oscillator is comparing the price of the market in relevance to the price range over a specific period. Developed by George C. Lane in the late 1950sd, The Stochastic Oscillator is comparing the price of the market in relevance to the price range over a specific period.

Why should I use it?

The Stochastic Oscillator can generate buy and sell signals in different ways.
It can point out when the market is possibly overbought, or oversold - signaling a sell or a buy accordingly.
It can signal a change in the market's direction as the %k line crosses over the %D (Explained below).
In addition, you can use the Stochastic Oscillator with the Divergence strategy introduced on the MACD indicator page.

How does it look like?

The Stochastic Oscillator is composed out of two lines:
The first is the %k line, which is the main line of the indicator.
The second is the %D line - which is the dashed line in the chart.
The %D line is a moving average of the %K line calculated in periods to your choice.
The two lines can get values between 0 and 100.

How does it work?

As an overbought/oversold indicator - you can consider any move of the Stochastic Oscillator above the level 80, as an indication the market is overbought, a sell signal is then triggered the next time the Stochastic is crossing back the 80 level form above downwards.
You can consider any move of the Stochastic Oscillator below the level 20 as an indication the market is oversold, a buy signal is then triggered the next time the Stochastic crosses back the level 20 from below upwards.
Crossover signals:
You can also regard the crossing of the solid %K over the dashed %D line as buy or sell signals in the following way:
When the solid line (%K) crosses the dashed line (%D) from below upwards it will indicate a buy signal.
When the solid line (%K) crosses the dashed line (%D) from above downward it will indicate a sell signal.
Divergence Strategy:
The Stochastic Oscillator can also be used with the very affective Divergence Strategy, you can learn all about this strategy on the introduction page for the MACD indicator.

Example

In this example the EUR/GBP is gradually trading up, until the price tops on Sep 4. The Stochastic Oscillator is then well above the oversold level 80, when it finally moves under 80 it triggers a sell signal just in time, before the market corrects downwards.

Standard Deviation

A statistical tool which measures the volatility of prices.

Why should I use it?

The Standard Deviation indicator will tell you in which periods the market is trading with high volatility (price rise or fall sharply), and in which periods the market is trading with relatively low volatility (relatively small changes in price).
Knowing how volatile the market is can be useful in many ways.
For instance: the market is constantly shifting from periods of low volatility to periods of high volatility, therefore, if we observe a long period of low volatility now, we can expect that the price will start moving more considerably very soon.

How does it look like?

The Standard Deviation indicator is a one line indicator which is drawn under your price chart, and can get positive values.

How does it work?

When the Standard Deviation indicator is moving higher, the volatility in the market is increasing.
When the Standard Deviation indicator is moving lower, the volatility in the market is decreasing.
Notice that even when the market is in a down trend and it does so while increasing volatility, the Standard Deviation indicator will go upwards - indicating higher volatility.
This indicator does not take the direction of the market into account.

Example

In the example below the market was trading calmly for a few days, and then around Dec 11 the price started to drop sharply as market conditions turned more volatile. Notice how the Standard Deviation indicator is moving up when volatility kicks in.

Stochastic Momentum Index (SMI)

Developed by William Blau in 1993, it is an extension of the Stochastic Oscillator indicator, only calculated slightly different (it regards the mid range instead of the true range of the price per period).

Why should I use it?

The SMI is a smoother version of the Stochastic Oscillator (less erratic and more even in its movement), therefore you can use it in a similar way you use the Stochastic Oscillator- Finding overbought/oversold levels, and using crossovers between the SMI lines as buy and sell signals.
Because it is smoother, the SMI is more controlled and in tone with the market, therefore it has a greater chance of filtering out false signals.
Try to insert both the Stochastic Oscillator and the SMI on the same chart, it will help you understand the difference between the two.

How does it look like?

The SMI is composed out of two lines.
The first is the %K line which is the main line of the indicator, and is also called the signal line.
The second is the %D line which is the dashed line.
Notice that the SMI can have any value between 100 and -100, meaning it can get negative values as opposed to the Stochastic Oscillator which can have only positive values.

How does it work?

Two common ways to read the SMI indicator:
As an overbought/oversold indicator:
The price is oversold when the SMI drops under -40, a buy signal is triggered the next time the SMI move back above -40.
The market is overbought when the SMI rise above +40, a sell signal is then triggered the next time the SMI move back below +40
Crossover signals:
You can also regard the crossing of the solid %K over the dashed %D line as buy or sell signals in the following way:
When the solid line (%K) crosses the dashed line (%D) from below upwards it will indicate a buy signal.
When the solid line (%K) crosses the dashed line (%D) from above downward it will indicate a sell signal.

Example

In the example below the SMI is providing a good sell signal in two different ways:
The first on Nov 23 when the %K line is moving under the %D line indication a sell.
The second sell signal was around Dec 7 when the SMI crossed back under the oversold level +40.
In this case, following the two sell signals was a sharp drop in the market price.

A Simple Moving Average (SMA)

A line on the chart which indicates what is the average price at any given time.
It is definitely the most basic and commonly used tool technical analysis has to offer.

Why should I use it?

A simple Moving Average can help you to spot the current trend and to recognize a possible change in trend, it can also point out possible levels of support and resistance. These, however, are just the most basic uses of SMA. As you become more and more familiar with this indicator, you will find out that there are endless possibilities to use it, and they reach for as far as your imagination and creativity can take you.

How does it look like?

The Simple Moving Average is composed out of one dynamic line drawn over the chart. The line shows you the average price for any time period in the past and present.

How dose it work?

We call it a moving average because it is moving together with time, constantly changing the average price with every new time unit.
In order to use the SMA you need to choose which time period you would like for calculating the average. If you open a 1 hour chart of USDJPY and then choose a Simple Moving Average of 10, the chart will show you the current average price of the last 10 hours. If you open a daily chart of USDJPY and then chose a Simple Moving Average of 10, the SMA line will show you the average price for the last 10 days.
Let's observe a few simple ways you can use a SMA in your trading:
Spotting a trend
When the SMA is constantly moving up, the market is in an up trend and the price is most likely trading above the SMA. If you believe the trend is going to continue, use the opportunity to buy when the price is correcting back to the SMA line. Conversely, when the SMA is moving constantly down, the market is in a downtrend and the price is trading under the SMA line. You can use the corrections back to the SMA as sell opportunities.
Notice that when the SMA line is moving sideways, it means the market is not in a trend, but rather in a range.
Spotting a change in trend direction - the "Cross Over" strategy
This is a very popular strategy which uses two moving averages with different time periods to find out when a change in the market's directions is likely to happen. For instance, open a chart and place two Simple Moving Averages on it. A short one of 10 periods, and a long one of 21 periods (you can choose any time periods you think are best).
Every time the short simple moving average of 10 (10SMA) is crossing the long SMA of 21 (21SMA) from below upwards, this will indicate a possible new up trend, and a buy signal. Every time the 10SMA is crossing the 21SMA from above downwards, this will indicate a possible new downtrend, and a sell signal.

Example

In this USD/JPY chart with a simple moving average, the market is first trending in a down trend. When the price finally breaks clearly above the SMA, it is an indication that the down trend is over, and a new uptrend is now forming. Notice how prior to the break, the SMA serves as resistance to the price and after the break above, it serves as support.

Relative Strength Index (RSI)

Developed by J. Welles Wilder in 1978, The RSI is a wildly used indicator for spotting overbought and oversold levels.

Why should I use it?

As a Forex trader, you always need to know when the price of the market might be trading too high (overbought), or when the price of the market might be trading too low (oversold).
If for example, you bought EURUSD at 1.2500, and the market moved up to 1.2700, it might be that at this price the market is overbought, and at any moment the sellers can jump in and push the price lower. In this case a tool that can indicate when the price is to high, will help you protect your profit by closing the position before the market's direction turns against you.
This is where RSI can help you. It will tell you when the market is possibly trading too high, providing you with the opportunity to sell, or to close any open position you may have on the buy side.
RSI will also tell you when the price of the market is possibly trading too low (oversold), providing you with the opportunity to buy, or to close any open positions you may have on the sell side.

How does it look like?

The RSI indicator is composed out of one line which is drawn under your price chart.
It can have any value between 0 and 100. The values 30 and 70 are key values for the RSI indicator.

How does it work?

The RSI Is very popular mainly because of its simplicity,
The market is trading too high (overbought), when the RSI indicator line is trading above the level 70, signaling you to sell. The higher the RSI is, the more overbought the price becomes.
The market is trading too low (oversold), when the RSI indicator line is trading under the level 30, signaling you to buy. The lower the RSI is, the more oversold the market price is.
The developer of the RSI, Welles Wilder, suggested to set the RSI on 14 periods. This is the default setting on Etoro's platform. However you can definitely experiment with different period settings to find the one best suited for your trading style.
Although the RSI is considered a very efficient indicator, it has one major weakness:
When the market is moving too fast in a short period of time, the RSI will provide false signals; therefore using the RSI in volatile market conditions should always be done with care.

Example

In this example we are observing a USD/CHF chart with the RSI indicator.
At first the RSI is moving under 30 (on Dec 4 around 19:00) indicating the price is oversold and by that creating a buy signal. Later on it is crossing above the level 70, indicating the price is overbought and by that creating a sell signal.