One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the Forex is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price activity, thereby increasing the statistical significance of the forecast.
Technical Indicators are one of the most important tools in technical analysis.
- Charting with Technical Indicators
Technical indicator is a mathematical manipulation of a security price and/or volumes aimed at forecasting of future price changes. Decisions about how and when to open or close positions can be made based on signals from technical indicators. According to their functionalities, indicators can be divided into two groups: trend indicators and oscillators. Trend indicators help to assess the price direction and detect the turn moments synchronously or with a delay. Oscillators allow to find the turning moments ahead or synchronously.
Inserting an indicator is possible from the “Navigator” window or from main menu, Insert > Indicators. It’s possible to add indicators from “Navigator” window to the price chart by drag and drop action.
All settings of each indicators can be modified and customised. It’s possible to modify them from the “Parameters”, “Levels” and “Visualisation” tabs.
- Popular Chart Indicators
The library of technical indicators for MetaTrader 4 developed in MQL4. This section contains thousands of applications that analyse financial markets using different algorithms. Now we’re going to describe most popular indicators in MetaTrader 4.
Bollinger bands are used to measure the market’s volatility. They act like mini support and resistance levels. Standard deviation is a measure of volatility, therefore Bollinger Bands adjust themselves to the market conditions.
MACD is an acronym for Moving Average Convergence Divergence. This is used to catch trends early and can also help us spot trend reversals. It indicates the correlation between two price moving averages.
Parabolic SAR Technical Indicator was developed for analysing the trending markets. The indicator is constructed on the price chart and made to spot trend reversals. This indicator only gives bullish and bearish signals.
Relative Strength Index (RSI)
The Relative Strength Index Technical Indicator (RSI) is a price-following oscillator that ranges between 0 and 100. When RSI is above 70, it means that the market is overbought and we should look to sell. When RSI is below 30, it means that the market is oversold and we should look to buy.
Average Directional Index (ADX)
The ADX calculates the potential strength of a trend and we could confirm whether the pair would possibly continue in its current trend or not. ADX indicator fluctuates from 0 to 100 and numbers below 20 indicating weak trend and above 50 indicating a strong trend.
Williams’ Percent Range
Williams %R is a type of momentum indicator that moves between 0 and -100, which determines whether the market is overbought/oversold. Indicator values ranging between 80 and 100% indicate that the market is oversold. Indicator values ranging between 0 and 20% indicate that the market is overbought.
These are the most popular and widely used indicators among Forex traders in MetaTrader. As you progress through your trading career, you will learn which indicators you like the best and can combine them in a way that fits your Forex trading style.