Types of Technical Indicators

Relative Strength Index

Relative Strength Index, RSI, is one of the most commonly used technical indicators. It is a relative concept, comparing the average rise in price to the average drop in price in a certain period. If the strength of the price movement can be measured this way, we could then indicate whether the currency pair is overbought or oversold.

RSI has a reading from 0 to 100. Traditionally, a value of 70 or above signals that the currency pair is becoming overbought (price being too high). A reading of 30 or below signals an oversold (price being too low) condition. So selling the currency pair when it is overbought and buying the currency pair when it is oversold is a general trading strategy with RSI.

Bollinger Bands

Bollinger Bands are a technical analysis tool invented by the famous technician John Bollinger. It is composed of a set of lines plotted two standard deviations, both positively and negatively, away from a simple moving average (SMA) of the asset. They are also the upper band, lower band and the middle band respectively.

(A standard deviation is just a measure of how far away the currency price is from its average or typical price.)

Bollinger Bands are a tool for measuring volatility, when the market becomes more volatile the bands are widened, conversely when the market becomes less volatile the bands are contracted.

The upper band and lower band actually act as dynamic resistance level and support level. When the currency price continually touches the upper band, it could be considered as reaching the resistance level and hence overbought; when the currency price continually touch the lower band, it could be considered as reaching the support level and hence oversold.