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Technical Indicators

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					These days, a user only needs to pick out the indicator value and the trading terminal will perform the
process of transforming the values with indicator formulae.



We will describe the principle of operation for the most useful indicators that are available on the Meta
Trader 4 trading platform and give you some examples of using them. These indicators are often used by
traders in everyday trading.



You can put some indicators like a moving average (the red line) onto a price chart.



A price chart can have windows opened below it to display some indicators 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 - detects breaking points in the current trend of price change.



As an example, an oscillator would be RSI and a typical trend indicator would be a typical moving
average indicator.



Trend Indicators



Moving averages (MA)



Of all the trend indicators, moving averages (MA) are the most widely used. The beginning and end of
trends will be picked up by combining them.
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. Depending on the method of
averaging out price values, there are four types of moving averages: simple (or mathematical),
exponential, smoothed and weighted.



Simple and exponential moving averages are the ones that are most used but there is practically nothing
different between all of the moving average types.



The last price value is emphasized by the exponential moving average which makes up approximately
18% of the indicator's value.



There are simple trading tactics for moving averages; buy when they are moving up and sell when they
are moving down.



As the redline represents a higher averaging period and the blue line represents the lower averaging
period, moving averages are generally used in combination. Buying and selling signals are the cross-
points.



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.



Average Directional Movement Index is displayed in a separate window of your terminal and consists of
three lines.



The trend direction is revealed by the direction lines (dotted lines). If a negative direction line (-DI, blue
dotted line) is below a positive direction line (+DI, red dotted line) then you should buy and vice versa.
The strongest signal for using trend indicators appears when an ADX line (green solid line) grows and
rises above the lower direction line.



It is a sign of the beginning of a new trend, because the strongest price movements originate from low
activity zones.



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. As well as price
values, the Parabolic System will take time into account.



The Parabolic System (SAR) is displayed in the form of dots. Dots are situated under price bars at the
ascending trend and above price bars at the descending trend. The price values near where you should
close your position are shown by these dots.



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.



This feature of the Parabolic System can protect a trader from doubts and adds a significant amount of
discipline to the process of trading: you either make profit or close a position.



However, as the Parabolic system will give a lot of false signals on markets with no trend it is not wise to
use this as an automated system. To get the best result from this indicator it should be used in
combination with other 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.



How you use the indicators and not how many you use is what separates the successful trader from the
beginner.



By understanding and interpreting these indicator signals the right way you will soon be making profit.



Price Oscillators



Stochastic Oscillator



The 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 buyers are unable to 'drag' closing prices to the
maximum of the day when prices are rising, the stochastic decreases in value and there is a decline in
lines and vice versa.



Red horizontal lines are stochastic levels. They have a default upper level of 70 and default lower level of
30. 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 simply implies that there will soon be a decline in price due to demand being
satisfied should the price frequently close near the maximum.



Equally, when prices are falling it is because sellers have been dropping them for a while meaning the
market will shortly be in a position to recover as offers weaken.



Be careful if you have decided to be guided by signal lines as these signals also work well on a market
with no trend. The stochastic will soon go below the lower level of above the upper level and stay there
when a trend appears, providing an incorrect buy or sell signal.



You can remove this shortcoming quite easily by inserting trend indicators like average directional
movement indices or moving averages onto the chart.



If minimums are narrow and not too deep this can show a weakness of sellers and a possible price rise
and vice versa, so the stochastic maximums and minimums need close attention.



Relative Strength Index (RSI)



The oscillator will see its values change within its 0 to 100 range and it follows the time period closing
prices.



Using the same logic as the stochastic, red, horizontal lines known as 'reference lines' will show just how
much the market is 'oversold' or 'overbought'.



You can choose values for reference lines by yourself, following the five percent rule: an indicator line
should be behind reference lines for five percent of the time within the last several months.
A feature of RSI is that graphical methods analysis are applied to its values.



Trend lines, price figures, support and resistance lines all work perfectly with RSI. Besides, it often forms
graphical analysis figures a bit earlier than price does so it allows a trader to start acting before others.



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.



The distance between two moving averages is shown by a MACD histogram which shows the difference
between short-term and long-term price movement directions to the trader.



Trading in the direction of the MACD histogram is the best way., i.e. if the current pole is higher than the
previous one you should look for opportunities to buy and vice versa.



Another feature of this indicator is that price peaks often follow peaks of its values. If within two weeks
the MACD histogram reaches a new maximum then this means that prices will continue to rise and
demand is strong.



Price and indicator divergence provides the strongest signal within the technical analysis and there is a
higher probability with its price movements predictions.



When there is no correspondence between the maximum or minimum of indicators and the maximum
or minimum of prices this is known as divergence.



The most notable divergence is the MACD indicator even though divergence can appear on all
oscillators.
Divergence is marked by red arrows on the picture above. 'Bullish' divergence shows a price rise and is
the left arrow and 'bearish' divergence is the drop in price and is the right arrow.



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.



Note that when the market is in a price 'corridor' trend indicators should not be used and oscillators will
work on bad trends. Experienced traders will find the right time to use an oscillator or trend indicator
unlike a beginner.



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.



You will find approximately twenty oscillators in the Meta Trader 4 terminal. You will no doubt master
them all in time but eventually you will be like most traders and only use 2 or 3 for your trades.



And don't forget that if you listen to what each separate indicator is saying to you, you will make money.



mt4 indicator - choose indicator according your needs

				
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