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Five MT4 Indicators Worth Using

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  • 03 November, 2012 GMT

By: DailyForex.com

One of the first things that I would say about using MetaTrader 4 indicators is that it is very easy to get inundated with hundreds of potential indicators as there is what seems to be an almost unlimited amount of them out there. The other thing that I would say first of all is that buying an indicator isn't necessary as there are so many free ones out there, that the premium ones quite frankly will do very little for you.

Speaking of premium indicators, it should be noted that indicators will only work when other traders use them. It is because of that that I would steer you towards the most common ones as the market simply needs to believe in the same thing or at least the same direction in order to move in a way that's going to be beneficial to your position. After all, the best way to move the market is to have a large group of traders see the same thing. This is why certain things like 50% Fibonacci retracement attract so much attention, its self-fulfilling prophecy as so many traders are aware of it. Having said this, there's absolutely no reason to find some "secret" indicator as the other market participants will be completely unaware of what this indicator is telling you.

Moving Averages

While not necessarily the most exciting or exotic of indicators, the moving average is without a doubt one of the most common ones. Remember, we are not trying to make this any more difficult than it needs to be, rather we are trying to profit from it. There are a seemingly unlimited amount of combinations of moving averages to use, but it should be noted that there are three specific values that appear over and over. The 50 day, the 100 day, and the 200 day moving averages all tend to appear on a lot of charts. This is because of the fact that traders tend to like large round numbers, and it should also be stated that on the daily chart the 200 day moving average represents a full year's worth of trading. (There are 200 trading days in the stock markets, and although it doesn't match up perfectly with the Forex markets, this habit has been brought over from Wall Street.)

MACD

MACD is probably one of the more popular ones as well. This acronym stands for Moving the Average Convergence Divergence. This particular indicator is an oscillator, and it is made up of three signals. These signals are calculated from historical price data, which is normally the closing price the three signal lines are the MACD line, the signal line, and the difference.

This indicator is used in a variety of ways, but it is essentially used to track momentum. Ironically, this is simply a type of amalgamation of moving averages. In a sense, it works very much the same way, and is a bit of a lagging indicator. Because of this, it is preferred to be used on longer time frames. There are a plethora of systems based upon this particular indicator, and as such is often cited by traders as being one of their more trusted indicators.

RSI

RSI, or the Relative Strength Index is an indicator that measures historical strength or weakness and as based upon closing prices of recent trading periods. This is a momentum oscillator, and as a result will measure velocity and magnitude of price movement. The RSI computes momentum as a ratio of higher closes to lower closes. RSI tends to be used on a 14 day time frame, and is measured from 0 to 100 for strength. A lot of times, you will see a dashed line at 30 and 70, which is the range for which RSI should typically hang about and. Once we get above those ranges, this shows extreme strength, or extreme weakness depending on whether we are in the higher or lower part of the indicator.

RSI is often used in a very similar manner to MACD, and as such many of the systems that use MACD and RSI are somewhat interchangeable. Nonetheless, this is a very popular indicator, you will see it used over and over again.

ADX

ADX stands for Average Directional Movement Index. Much like the RSI, this indicator tends to measure strength in a series of movements over the course of time. This indicator is often used to differentiate between true momentum, and low liquidity spikes in price.

By using the ADX, you are comparing the recent movement to average movements over the course of a longer time period. The ADX doesn't show the direction of a trend, only the strength. The trend of must be established in order to use this indicator. Strong trends that measure over 70 are often thought to be more reliable as it shows real momentum building in the currency pair.

Bollinger Bands

The Bollinger Bands are one of the most commons indicators out there currently. You'd be hard-pressed to find a trading platform that does not include them. Bollinger bands essentially use a moving average as the centerline, which of course is surrounded by two other lines that measure ounce standard deviations from the moving average. In other words, a standard deviation of one is the average price movement away from the moving average. Many Bollinger band traders use a deviation of two in order to see when a market is either overbought or oversold. The idea is that price will eventually come back to the moving average.

The deviations are measured over the course of recent price action, and as such you will see the width of the bands shrink and expand depending on volatility. There are numerous ways used on your man's, and probably an unlimited amount of systems out there. Because of this, Bollinger bands can be a very useful instrument.

Christopher Lewis

Christopher Lewis has been trading Forex for several years. He writes about Forex for many online publications, including his own site, aptly named The Trader Guy.

1 Comments

  • WYFXco

    @Christoper -
    Great article, really. As a Trader + Vendor for Metatrader tools, I have spent nearly a decade since MT1 researching and stumbling upon similar type articles. I am fairly sure this is the first time someone has elevated the importance of the 2 points you made:

    1. STOP believing that some 'secret' indicator actually exists and wasting time endlessly in search of it. Price is either trending up, or it is trending down. The Market is not a video game, there is no way to unlock some secret doorway by hacking the code. The code was not already written and compiled into a game... it is being continually written with each new incoming tick.
    2. STOP basing your entire strategy and making trade decisions based on some obscure, squiggly-line, 'secret' indicator that some random, anonymous person said he/she was making a fortune with on some random Forex forum.

    Like you outline, what makes more logical sense?

    1. To begin to take some profit or re-establish at levels, such as the 200 MA or Fibo50%, that EVERY professional trader in the world is staring at on their chart and has action plans in place for when it approaches?
    2. Or, that 'secret' level produced by that MT4 Indicator you bought for $7.73 in a eBay auction?

    If ever in question, we should always choose the decision level that has the built in, self-fulfilling prophecy factor to put statistical probability on our side... exactly like you noted. steve@wyfxco.com

    WYFXco November, 2012

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