One of the hardest, most time-consuming aspects of trading is figuring out what trading style(s) and time frame(s) suit you best. From the technical analysis perspective, that means finding the right toolbox of forex indicators you habitually use and learn very well.
Forex indicators are useful in helping to answer the following common trader dilemmas.
The consensus is that about five forex indicators are the right balance between enough information to make informed decisions and not too much so that you suffer from information overload, aka paralysis by analysis. Practically, an accurate combination of forex indicators can mean anywhere from three to seven; it’s ultimately your choice. You don’t have to stick with the same tools all the time; just limit the number you’re watching at any given time. Those trading longer time frames have more time and can afford to look at more indicators. They also need to be better informed about the long-term fundamentals of both:
This is critical. At a minimum, it involves following a few good fundamental analysts to read and at least one big picture indicator like the S&P 500 Index (and what’s driving it for your chosen time frame).
While your exact choice of indicators can vary with preference, needs, and trading style, the overriding principle in selecting your tool kit of indicators is to have a balance that gives you a “gang of four” of different kinds of information you need, specifically:
Trend-following indicators, as the name indicates, are designed to take advantage of trends in the market. Examples include moving averages (MAs), the average directional index (ADX), and on-balance volume (OBV).
Range-based indicators are mostly designed to show overbought and oversold conditions in a price range and include Bollinger Bands, the Commodity Channel Index (CCI), the Relative Strength Index (RSI), and stochastics indicator. Some indicators, like the moving average convergence divergence (MACD), can be used to generate either a trend-following or a range-based trade signal depending on the time periods used in its calculation.
Probably the best forex indicator in the world is Double Bollinger Bands - Bollinger Bands with a brilliant extension. DBBs are really a hybrid trend and momentum indicator. In range-bound markets, DBBs provide support and resistance (s/r) points. When there’s a trend, they show the trend’s momentum and likely staying power.
The basic problem traders and investors face is that we get paid for being right about what happens in the future, yet most of the popular indicators we’ve covered thus far are more lagging than leading indicators.
They tell us about the past, and from that information, all we can do at best is to form some hypotheses about the future.
What’s a trader to do? Use momentum indicators. They’re leading indicators because:
Knowing these can help you forecast changes and be more profitable.
Momentum indicators can give you additional clues to put the odds of being correct even more in your favor. There are many momentum indicators, but for now we will introduce just a few of the most effective and easiest ones to use:
Three kinds of basic oscillators: Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and Stochastic Oscillator.
As with any indicator, you can use these without fully understanding how they work, though if you do, you’ll be able to use them more effectively and know how to adapt them to specific situations.
You should strongly consider using Double Bollinger Bands and one or two oscillators of choice, especially moving average convergence/divergence (MACD). A set of moving average lines as we saw earlier (10, 20, 50, 100, and 200 periods) not only serves as a momentum indicator, it also provides s/r points, too.
In addition to obvious price levels that stand out on your chart (and on time frames four to five times shorter and longer), you should always watch:
You should consider using the pivot points. A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day. On a subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates a bearish sentiment.
The pivot point is the basis for the indicator, but it also includes other support and resistance levels that are projected based on the pivot point calculation. All these levels help traders see where the price could experience support or resistance. Similarly, if the price moves through these levels it lets the trader know the price is trending in that direction.
Fibonacci, Elliott Wave, Gann, DiNapoli, and similar studies are timing or cycle indicators.
For example, your typical technical tool kit might include, in addition to an awareness of any obvious s/r points:
If you spot any Western-style chart pattern forming, note the implied s/r levels (highs, lows, necklines, shoulders, etc.). Japanese candlestick patterns provide shorter-term signals of trend continuation or reversal.
You’d then apply this group of forex indicators to the time frame in which you trade, as well as those four to five times longer and shorter. For example, if you trade off daily charts, you’d also look at weekly and two- to four-hour charts (depending on whether you define your trading day as 24 hours or 8 to 10 hours).
A good charting program like that included with MetaTrader 5 will allow you to store any group of indicators you like as a chart template that can be applied to any chart of any asset or time frame your broker offers.
The purpose of your first screening on the longer time frame (weekly, in our examples) is to find longer-term s/r points than you would see on the charts on which you trade, and hopefully, find a currency pair that looks like it might reach that s/r area and provide a low-risk entry point. That’s the first step in locating low-risk, high-yield trades.
Your second screening would then examine the likely entries and exits on the shorter time frame chart from which you trade, to see if you can find situations where your entry point is two to three times farther from your exit than it is from your stop loss. The profit-taking point is usually easy to spot. It’s whether you can get the right stop-loss point that usually determines whether you take the trade.
Your third screening would check your shorter time frame (two- to four-hour charts in our examples) to look for any short-term s/r points, just so you’re aware of temporary s/r points. If those hold too long or too often, your trade may be showing signs of failing and you might want to reduce your position size. If, however, these are quickly breached, that’s a sign of progress and a signal to consider adding to your position.
The most convenient way to apply an MT5 indicator is to drag it from the Navigator window. You can also use the Indicators command from the Insert menu or button Indicators on the Standard toolbar.
The settings of a running MT5 indicator can be changed. Select the required indicator in the Indicator List and click "Properties" or use the indicator context menu on the chart.
Use the context menu to manage indicators:
You can conveniently customize the appearance of indicators in the trading platform. You can set up the indicator parameters when applying it to a chart or modify them later. The indicator appearance is adjusted on the "Properties" tab:
Indicator line color, width, and style are set up in the "Style" field.
Indicators can be plotted based on price data and derivatives thereof (Median Price, Typical Price, Weighted Close), as well as on the basis of other indicators. For example, you can apply Moving Average to Awesome Oscillator and have an additional AO signal line. First, you need to draw the AO indicator, and then apply the MA to it. In the MA settings select option, "Previous Indicator's Data" in the "Apply to" field. If you choose "First Indicator's Data", MA will be applied to the very first added indicator, i.e. it can be any other indicator.
Nine variants of indicator construction are available:
For some indicators, additional levels can be enabled. Open the "Levels" tab, click "Add" and enter the level value in the table. You can also optionally add the level description.
The line color, width, and style for the levels can be set up below. To edit a level, click "Edit" or double-click on the appropriate field.
For indicators applied to a price chart, levels are drawn by summing the indicator values and the specified level. For indicators drawn in a separate subwindow, levels are drawn as horizontal lines through the specified value on the vertical scale.
The indicator display for different timeframes (period) can be set up on the "Visualization" tab. The indicator will only be displayed for the selected timeframes. This can be useful when the indicator is designed for use on specific timeframes.
Option "Show in the Data Window" allows managing indicator information displayed in the Data Window.
Forex indicators are great for guiding us in manual trading. However, if we want to automate trading and leave MetaTrader trade on its own while we do other things we cannot do that with simply using indicators. MetaTrader Indicators contain no trading logic. Here come Expert Advisors.
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