Technical Indicators

By Author: Jed Seitz
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These days, a user only needs to pick out the mt4 indicator value and the trading terminal will perform the process of transforming the values with indicator formulae.We shall provide some examples of use and describe how the most useful indicators available in the Meta Trader 4 trading platform work in principle. Traders will frequently be using these indicators when they trade day-to-day.Some indicators can be put on a price chart, for example a moving average - the red line on the price chart.A price chart can have windows opened below it to display some mt4 indicator such as Relative Strength Index (RSI).All indicators can be divided into two groups for convenience in accordance with their purpose:* Trend indicators - Show the existing price change direction trend.* Price oscillators - Any breaking points that in the current trend of the price change are detected with these.As an example, an oscillator would be RSI and a typical trend indicator would be a typical moving average indicator.Trend IndicatorsMoving ...
... averages (MA)The most widely used trend indicators are moving averages (MA). Their combination detects the beginning and end of a trend.The operating principle of this indicator is simple; a moving average averages out price values for a definite time period and displays smoothed values in the form of lines. According to the averaging out price value method, four types of moving averages exist: weighted, smoothed, exponential and simple (mathematical).So there is pretty much no difference between all of the moving average types and exponential and simple are the ones that are used most frequently.An exponential moving average emphasizes the last price value (the last price makes about 18% of the indicator value).There are simple trading tactics for moving averages; buy when they are moving up and sell when they are moving down. Generally, a combination of moving averages is used, when one of them has a higher averaging period (red line), and another has a lower averaging period (blue line). The cross-points are signals for buying or selling. It also happens quite often that moving averages of a definite period can be a support/resistance for prices during retracements.To most effectively use the moving average find a period when most of the price retracements are 'rebounding' back from the moving average line. By studying the principles and properties of moving average you will soon become familiar with the concept of technical indicators.Average Directional Movement Index (ADX)By calculating a price corridor for a specific time period this indicator goes beyond the scope of the previous one. The analysis and calculation of this shift will estimate the buyers and sellers potential for raising or lowering prices throughout a definite period in relation to the previous one's borders. There is a simple conclusion when using this indicator: if yesterday's maximum is lower than today's, then most will buy and if yesterday's price minimum is higher than today's then most will sell.A separate terminal window will show the Average Directional Indicator which consists of three lines.Direction lines (dotted lines) point to the trend direction. When a direction lien that is positive (+DI, red dotted line) is over a line that is negative (-DI, blue dotted line), the you should be buying and vice versa. When a green line (the ADX line) grows and rises over the lower direction line, this is the strongest signal to use the trend indicator. As the strongest price movements originate from the low activity zones, this is the sign of the new trend beginning.Parabolic System (SAR)A Parabolic System (SAR) is one of the most successful tools for detecting trends. Its basic advantage in comparison with other trend detection indicators is that the Parabolic System gives a clear guideline for exiting the market and also allows a trader to get rid of trends which lead to nowhere. In addition, the Parabolic System not only takes into account price values but also time.Dots are used to display the Parabolic System (SAR). Price bars in an ascending trend will have dots placed under them and over them when the price bars in a descending trend. These dots are the price values near the point where you should close your position.When prices change slowly at the start of a trend, a Parabolic System will also change slowly. When the market starts giving new maximum or minimum price values, the Parabolic System follows the price movement direction and pulls up the level of exit from the market. As this feature of the Parabolic System states that you either make a profit or close a position, discipline is added to the process and trader doubt is removed.The Parabolic System shouldn't be used as an automated system as it gives many false signals on a market without a trend. This indicator produces the best results in combination with other trend indicators.We will keep our focus on the three indicators that we have described above although there are 6 trend indicators that are available on the Meta Trader 4 terminal. The correct use of the indicator as opposed to how many indicators you use is how the successful trader is separated from the beginner. Correctly interpreting and understanding these indicator signals will see you make a profit soon.Price OscillatorsStochastic OscillatorThe ability of sellers and buyers to set closing prices for a specific period of time following on the heels of the earlier period is reflected by this indicator. So if closing prices cannot be dragged to the day maximum when prices are rising, then the stochastic will decrease in value and there will be a decrease in lines and vice versa.Red horizontal lines are stochastic levels. There default values are 70 for the upper level and 30 for the lower level. When the lower levels are hit by the stochastic levels this indicates a state of market that is 'oversold' whereas when the upper levels are hit by the stochastic this indicates the market is 'overbought'.The notions 'overbought' and 'oversold' are relative and provide no real data about the number of bought or sold contracts. It just gives a hint that with price often closing at somewhere close to the maximum, it is likely that demand will be satisfied and there will soon be a decline in prices. And the same applies to prices that are falling; with sellers reducing prices for a while, offers will shortly weaken and the positions on the market will soon recover.If you've decided to be guided by signal lines, be careful as these signals work well on a market without a trend. But when a trend appears, the stochastic quickly goes above the upper border or below the lower border and stays there, providing false signals to sell or buy. You can easily eliminate this shortcoming by supplementing a chart with a trend indicator like a moving average or an average directional movement index.The minimums and maximums of the stochastic need to be watched: minimums that are not too deep and are narrow will show a weakness of sellers and a possible growth in price and vice versa.Relative Strength Index (RSI)The closing price of time periods is followed by the oscillator; within the 0 to 100 range values will change.Red horizontal lines are called 'reference lines' and identify how much the market is 'overbought' and 'oversold' using the same logic as the stochastic. The five percent rule should be followed if you want to choose the values of the reference lines yourself; this is that indicator lines should stay behind the reference lines for about 5% of the last several months.RSI has a feature where values have graphical methods analysis applied to it. Trend lines, price figures, support and resistance lines all work perfectly with RSI. Traders can often start acting before others as graphical analysis figures are formed a little earlier than price.Moving Average Convergence/Divergence (MACD)Oscillator is a loose term for this indicator as its values are based on the trend indicator values - two moving averages. But, according to the Meta Trader 4 terminal it is an oscillator.A trader can be shown the difference between long-term and short-term price movement directions in a MACD histogram which shows the distance between two moving averages. The best way is to trade in the direction of the MACD histogram, i.e, there are buying opportunities if the previous pole is lower than the current one and vice versa.The peaks in values on this indicator will often be followed by price peaks which is another of its features. Prices will rise higher and demand is strong if the MACD histogram reaches a new maximum within two weeks.Price and indicator divergence provides the strongest signal within the technical analysis and there is a higher probability with its price movements predictions. Divergence is a situation when price maximum or minimum doesn't correspond to the maximum or minimum of indicator values. Even though all oscillators will show divergence, the most notable is the MACD indicator divergence. Divergence is marked by red arrows on the picture above. The left arrow points to the 'bullish' divergence showing a price rise and the right arrow points to the 'bearish' divergence which shows a price drop. Divergences of the MACD indicator appear rarely, but if you only monitored this signal and controlled risk you would achieve success without using any other tools.Pay attention to the fact that trend indicators shouldn't be used when the market is in the price 'corridor', and oscillators work bad on trends. Beginners won't be able to know when the time is right to use an oscillator or trend indicator whereas an experienced analyst will.A useful rule of thumb if you have any doubts about the signals from an indicator is to reduce the oscillators time period and increase that of the trend indicator in conflicting occurrences. It will help you to avoid any traps that may appear on the market.The Meta Trader 4 terminal will have roughly 20 oscillators. In time they can all be mastered but most traders will only use 2 or 3 for day-to-day trading.And remember that each separate indicator is there to make you money as long as you listen to what it tells you.