Lesson 7 – The Indicators

Indicators are the instruments of technical analysis that calculate price movements and give a trader the opportunity to make the right decision about entering or leaving the market. It is important to mention that there are no “miraculous” indicators that can predict the price. All indicators are based on the historical development of prices. Therefore, indicators are subjective.

In Forex, there are a lot of indicators; people are constantly creating new ones, improving old ones, making them available commercially or for free. However, a lot of them are duplicating each other or making only insignificant changes.

Indicators are divided into three groups:

• Trend indicators show the continuity or change in the present price trend, in real time or with a short delay.

• Oscillators show ahead of time or with a delay when a market is re-bought or re-sold.

• Psychological indicators show market players’ moods.

You can insert, and you can use more than one at a time to see the situation more accurately. But beware of overloading a chart with indicators (use no more than four to five indicators)—it will not benefit you.

MT4 is offering a wide choice of indicators, and we will investigate some of them here.

Moving Average (MA) is considered one of the most popular indicator, it is a trend indicator, and it draws a line that shows the average price for the particular period. For example, the Moving Average for 21 days is the average market price after 21 days. The moving average is calculated as follows: the closing price is added over a given period and divided by the number of days. Each new candle is calculated in a chart in this way. Therefore, we can see that in some places the present price is higher than the moving average, in some places lower, and in some places crossing it. The crossing point signals that the price changed its direction (see picture below).

Different moving averages can be uploaded to a chart (for example, ‘a short one’ and ‘a long one’ with different time intervals). In figure 2, the blue moving average (9-day period) is crossing the red moving average (21-day period). Where the red line crosses the blue line from the bottom is a signal to buy.

The moving average indicator is used in various ways. First of all, if the price is above the indicator line, it means that the trend goes towards a price increase; if the price is below the indicator line, it means that the trend is towards a price decrease. Second, if two indicator lines cross each other (the moving average of a shorter period is crossing the moving average for a longer period) we have a possible sign that a trend changed its direction.

As we see, the MA indicator is used in a very simple way, which is exactly why it is so popular. In general, all the other indicators are much more complicated. They include the oscillators MACD, RSI, or Stochastic.

Oscillators show trend changes or small corrections. They are particularly effective when the price is within a range (flat); they show a trader how much a market is overbought or oversold. Oversold is when the market is in a strong downwards trend for a long time and the oscillator shows that the price may start going up. Vice versa, overbought is when the price is more in a buying zone; therefore, a change is possible.

A trader sees in which zone the price is (overbought or oversold) and can try to decide whether the price will continue to increase or decrease. If a price is overbought for a long time, it is a sign that it is risky to buy now, and that it is better to think about selling. However, it does not mean that the price is going to move the direction the indicator shows. The price can stay in either zone for a very long time.

In figure 3, we see that if the price is in the indicator’s zone above 80, it means that the market is overbought —a sign that you should sell. If it’s in the zone below 20, it’s a sign that you should buy.

As we see, indicators are very useful instruments. A trader may notice right when the trend is beginning to change and open a trade that lets him benefit from this change. The best situation is when the indicators show the same—when they confirm each other.

How to insert an indicator to MT4 chart

In MetaTrader 4, open a chart and click Insert, choose Indicators, and pick which one(s) you want. You can change the indicator settings in the settings window.

 

Exercises

1. Open the GBP/USD chart with a time-frame of H1 in MT4 and insert the Stochastic indicator. Review the history (covering half a year) and try to determine the places where, in your opinion, it was optimal to open trades using this indicator.

2. Insert a Moving Average indicator with a 21-day period (21 SMA) in the same chart and try to see if you were able to determine the trend’s beginning and end.

3. Now try to use both indicators at the same time. Find the places where, in your opinion, the indicators gave the same signals at the same time.

 

I wish you success!

Do you have any questions? Please write your questions in the comments section—we will do our best to solve them with you!