Overlay indicators are those that show up right on top of the price data. Without doubt the most popular overlay indicator is the Moving Average. I have eleven different moving rates available on the charting platform I use. However you are not limited to just moving rates. Here is a brief introduction to a few of the most popular overlay indicators.

Moving Averages: Moving rates should be the first indicator you explore as a new Forex trader. They are simple to use, read and understand. Moving Lessons also has the added benefit of being widely used. They can sometimes be self fulfilling. The major draw back is that they are mostly based on past experience, and lag behind the market.

The usual way to trade moving rates is to look for cross overs between a shorter and longer term average. Be careful though. Trading from one cross to another is never profitable in the long run. You must find a filter that keeps you out of what is called the whipsaw effect, taking several trades in a row that go immediately against you.

Bollinger Bands: The great thing about this indicator is that the person that developed it is still alive and publishes articles, books and regularly talks about the indicator itself. He is a respected trader and has been successful for many years. The indicator is designed to generate two lines that recognizes either a relative overbought or oversold condition in the market.

Just like the previous indicator though, it does have a draw back. The overbought or oversold condition can last for a long time. Trading from one line touch to another, in the long run, is unprofitable. Again you need a filter to keep you in the long runs or out of the whipsaw.

Price Channel: The price channel displays just what its name implies, a channel. One line is drawn at the highest price for a given number of days, another is drawn at the lowest price for the same number of days. Most versions also have an average that runs between the upper and lower line. The given number of days is usually 14 or 20.

When using the Price Channel Indicator to trade Forex, you will belong to one of two camps. Some belong to the buy at the low, sell at the high group, while others do exactly the opposite. If you belong to the first group, you are trying to buy and sell into the direction of a trend on a pullback, while the second group is buying and selling breakouts. Both are good strategies, but must be accompanied by a filter, and stop loss to limit your exposure to whip saw.

Source by Kimball Hall