what are basic mt forex indicators
TRANSCRIPT
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What Are Basic MT4
Forex Indicators?
Verified and provided to you by
Anna Forex Monti
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What Are Forex Indicators?
Indicators are used for identifying, or even creating patterns from the chaos of the
currency market. In all cases, they receive the raw market data as the basic input,and manipulate it in differing ways to create (as opposed to discover) actionable
trading scenarios. The natural consequence of this description is that indicators are
not tools of prediction. Instead, they are used to give order to the price data, so that it
is possible to identify possible opportunities which can be exploited profitably by the
trader. No indicator is right or wrong with respect to the signals that it emits, but each
of them must be used with an appropriate money management strategy in order to
deliver the desired results.
There are many different kinds of indicators, and it is not at all a hard task to define
one's own tools for the purpose of evaluating the market provided that a basic
literacy in averages is attained, what is desired from the created indicator is made
clear. Different constructions will lead to differing techniques which can then be
employed most effectively as part of a trading strategy.
So you can regard indicators as your compass and ruler in navigating waves of the
forex market. We would use a compass or a ruler to predict when or where a storm
will hit, but every sailor knows their usefulness in defining a path over the high seas.
Use your indicators to plan your journeys in forex, while protecting your funds with
proper money management techniques, and all will be well for you.
Moving Averages: What Are They?
Moving Averages are technical tools designed to measure the momentum and
direction of a trend. The idea behind their creation is simple. Price action is thought tofluctuate around the average value over a period of time, and we can expect to be
able to the represent the market's momentum by calculating if the current prices are
above or below the market's average value. But since the total length of the time
period that must be included in the calculation of the average is too large (are we
going to begin in 1980, or the year 2000 while computing our time series?), we pick
the period arbitrarily, and update the average as time progresses.
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Why Should I Use Moving Averages?
Moving averages are some of the most useful and effective gauges of market
action in a trending market. Crossovers, divergences, as well as trends of the moving
average itself can be used to analyze and crystallize the signals that can be distilled
from the market action, which can then be used to help us make future decisionsabout our trades.
Types of Moving Averages
There are a large number of moving averages available for traders. Some of them
are:
Simple Moving Average
The simple moving average is the most basic of these tools. It simply sums up the
cloaisng prices over a specified time, and divides them by the duration of the period,
reaching at the value of the indicator. No weighting is used, and no smoothing factor
is applied.
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Exponential Moving Average
The exponential moving average is one of a number of different moving average
types that gives greater value to the most recent prices. As its name implies, the
weighting is done exponentially. In other words, as we move to the left on the chart
(towards past values), the weighting that they receive in the computation of the MA
decreases rapidly (faster than it would be in a linear progression), and the mostrecent prices are far more significant, as a result, in determining the value of the
indicator.
Smoothed Moving Averaged
The smoothed moving average is similar to EMA, except that it takes all available
data into account. The earliest price values are never discarded, but receive a lower
weighting, and possess a smaller role in determining the value of the indicator. As itsname hints, the smoothed moving average is mostly used to smoothen the price
action, removing short-term volatility, allowing us a better understanding of the long
term momentum of the market.
Linear Regressed Moving Average
This moving average is similar to the MA, except that the weighting factors are
linear, not exponential. For example, the price of the earliest period (n) is multiplied
with 1, the following, more recent period (n-1) is multiplied by a factor of, 2, and thenext one is multiplied by 3, and so on, until we reach the present timeframe. In this
context, the most recent prices receive greater emphasis, and the latest fluctuations,
rises or falls are depicted with greater clarity, aiding trade decisions.
Using the Moving Averages
Although there are almost countless improvised, and professionally created
strategies based on moving averages, there are three typical methods that lie at the
basis of most of the strategies and methods.
Crossovers
Crossovers arise when the price rises or falls below the moving average, signaling
the end or the beginning of a new trend. Crossovers are some of the most common
occurrences in technical trading, and as such, do not grant us a great deal of
predictive power in the evaluation of the market action. They are used best in
combination with other tools and techniques when we seek to evaluate the price
action with greater confidence.
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Moving Average Trends
Apart from trends in the price action itself, the moving average can also have its
own trend at times. It is possible to take advantage of these trends for determining
entry/exit points. Although not as reliable as the price trend itself when used alone, it
can be an efficient way to confirm the price action when used in combination with it.
Divergence/Convergence
A divergence occurs when the trend is in ascendance, but the moving average is
descending. A convergence happens when the market trend is bearish, but the
moving average contradicts it by registering higher highs. These events are thought
to signal a future reversal. When the price action is contradicted by the indicator
values, the expectation is that the market is about to run out of energy, and it may be
a good time to open a counter-trend position. It is important to remember that timing
is very uncertain in all these formations, and that the anticipated reversal may neveroccur. Especially in strong trends, it is common to observe divergence/convergence
phenomenon arise regularly without leading to any significant reversal. Still, it is the
rarest, and most popular technical configuration preferred in the interpretation of a
moving average.
MA Hopping
We use this term to define a method of trading in which MAs of different periods
are used as successive resistance levels for the price action to breach. For example,
we expect an ongoing trend to first breach the 1-hour, then the 3-hour, then the 10,
and 40-hour moving averages in succession, and may choose to open a position at
each of these successive indicators. Since we anticipate continuity between levels
indicated by these MAs, we will maintain our positions as the price hops, so to speak,
between them.
We'll examine each of these methods as we discuss each moving average type in
its own article. To learn more about how these calculations are performed you are
invited to visit the relevant page.
Conclusions
The main weakness of the moving average is its lagged nature. In many cases, and especially
for short term fluctuations, by the time a moving average captures a market event, it may have
already ended. The moving average will only note a developing market pattern after it has been
set up convincingly, and if the pattern is short-lived, it will not be possible to trade it, and we may
suffer from whipsaws as well.
The strength of this indicator type is its ease-of-use, clarity, and simplicity. They can be easily
incorporated into any overall strategy, and it is also possible to devise methods exclusively
through the usage of the moving average as well. The great versatility of this indicator type
makes it a valuable addition to any trader's arsenal of technical tools, regardless of trading style,or the preferred market type.
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Larry Williams Indicators
As the name suggests, Larry Williams indicators are a group of technical tools
developed and published by the renowned commodity and stock trader Larry
Williams in a series of books and articles since the 80s. In this article we'll present a
brief overview of the most popular ones among the tools developed by him. Theindicators themselves will be examined in their own articles at this website.
Larry Williams: A Trading Legend
Born in 1942 in Montana, Larry Williams is one of the most famous traders of our
time. His greatest claim to fame arises out of his success in the World Cup
Championship of Futures Trading in 1987. During this contest, Larry Williams was
able to turn $10000 to $1,1 million in about twelve months using techniques that he
had developed earlier in his carrier. Since then, he has been the author of articlesand books about trading, providing the public with interesting insight to his trading
skills, and sharing the technical basis of his success with other traders. In 1997, his
daughter Michelle Williams also gained the first place in the same competition.
Types of Williams Indicators
Larry Williams created a
large number of indicators the
rationale behind which is
explained in his variousbooks and articles. With his
celebrity status in the trading
community, it was not long
before brokers incorporated
his ideas into their own
software and trading
packages, and today the
Williams Percent Range
indicator, for example, is a
part of the standard technical
charting toolbox of just about
any broker.
Williams Percent
Range Indicator
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Similar to the Stochastics indicator, Williams Percent Range Indicator is one of
the most popular tools created by the famous trader. It is basically a volatile
oscillator the signals of which are acted upon only if they last for a considerable
period of time. Unlike the RSI, for example, one doesn't buy or sell at
overbought/oversold levels, but awaits the consolidation of the price in these
regions before any conclusion is reached.
The Williams Oscillator is widely available as part of most forex charting
packages.
Larry Williams has developed many ways of measuring the
accumulation/distribution phenomenon in the markets in light of volatility, open
interest, volume, and many other factors. These indicators are not as common as
the percent range indicator, but they are popular and highly regarded by traders.
Williams A D Accumulation Distribution
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Williams Ultimate Oscillator
The Ultimate oscillator was created for the purpose of reducing the effect of
short-term large movements on the signals generated. The indicator measures
accumulation/distribution in the market, instead of focusing on the price directly,
and can also be configured to fluctuate in accordance with three different time
cycles corresponding to 7, 14, and 28-period measurements.
The indicator is used on the basis of divergence/convergences, and a signal is
confirmed with a trend break, which is a gap in the price indicating that the
momentum of the price action has changed decisively. Positions are opened on the
basis of highs or lows registered on the oscillator.
Greatest Swing Value Indicator
This is not so much as an indicator as it is a concept introduced by Larry Williams
in one of his books. Used with simple bar charts, or in more complicated
configurations, the Greatest Swing Value concept is used by swing and range
traders for establishing trade patterns.
Blast Off Indicator
This indicator is not very common, since it is a proprietary tool, but Larry Williamswill not hesitate to talk about it during his appearances in meetings or seminaries
with other traders.
Conclusion
Needless to say, Williams indicators are very popular in the trading community. The
trading record of the creator of these tools is enough in itself, for many people, to justify
their use. Nonetheless, anyone who regards these tools as charmed items that will protect
their users from error is likely to be disappointed in short order. As with any indicator, using
the Williams indicators requires, above all, a reasonable degree of skepticism about their
effectiveness. No indicator will eliminate the necessity of a diligent and focused approach
to risk management. These tools are no exception.
In this group, the most popular ones are the Williams Percent Range indicator and the
Ultimate Oscillator. Although we're going to examine both of them in greater detail in a
separate article, we may note here that as trend indicators that are volatile themselves,
and will generate good results only if the signals emitted by them are used with great
conservatism. In other words, pick the most convincing, and long-lasting signals, as you'll
have plenty of them to act upon in any case. It is possible to do very well with these great
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indicators when one treats risk sensibly and does not get carried away by his successes,
or allow his failures to chop off a large chunk of his account by trading too much.
Oscillators Explained
Oscillators are a group of indicators that confine the theoretically infinite range of theprice action into more practical limits. They were developed due to the difficulty of
identifying a high or low value in the course of trading. Although we may have mental
concepts of what is high or low in a typical day's price action, the volatile and chaotic
nature of trading means that any high can easily be superseded by another one that
sometimes follows on the heels of a previous record, and negates it swiftly. In short,
practice and experience tell us that prices in themselves are very poor guides on what
constitutes an extreme value in the market, and. oscillators aim to solve this problem by
identifying indicator levels that hint at tops or bottoms, and helping us in the decision
process.
Why should use I oscillators?
There are two ways of using an oscillator. One is to determine turning points, tops and
bottoms, and this style is usually useful while trading ranges only. Oscillators are also used
trending markets, but in this case our only purpose is joining the trend. Highs or lows, tops
or bottoms are used for entering a trade in the direction of the main trend.
Types of Oscillators
There are many kinds of oscillators available for the trader's choice, and although they
have different names and purposes in accordance with the creators' vision, there are a
small number of distinctions that determine which group an oscillator falls into, and where
or how it can be used, as a result.
It is possible to group oscillators first on the basis of their price sensitivity. Some, like the
Williams Oscillator, are very sensitive to the price action. They reflect market movements
accurately, but under the default configuration do not refine movements into simpler,
clearer signals for the use of the trader. Oscillators like the RSI are less volatile, and aremore precise in their signals, but also less sensitive to the price action, which means that
two different movements of different volatility and violence may still be registered in the
same range by the RSI, while the Williams Oscillator analyzes it more accurately to reflect
its violent nature. Some oscillators provide limit values to determine various
oversold/overbought levels, while others create their signals through the
divergence/convergence phenomenon alone. In general, oscillators that provide
oversold/overbought levels are useful in range patterns, others are mostly used in trend
analysis.
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Let's take a look at a few examples to have an idea of the different types oscillators used
by traders.
MACD:The MACD is one of the most commonplace indicators. It is a trend
indicator, and it is useless in ranging markets. MACD has no upper or lower limits, but
does have a centerline and some traders use crossovers to generate trade signals.
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RSI: RSI is another commonplace and relatively aged indicator used by range
traders. It is almost useless in trending markets.
Williams Oscillator: An excellent tool for analyzing trending markets,
especially those highly volatile, the Williams Oscillator requires some commitment
and patience to get used to, but it is popular, partly due to its association with the
trading legend Larry Williams.
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Commodity Channel Index: The CCI is particularly useful for the analysis of
commodities and currencies that move in cycles. It is not as popular as the others
mentioned above, but it has been around for some time, and has stood to test of
time.
Using the Oscillators
Each oscillator has its own how-to of trading the markets. Some provide the
aforementioned overbought/oversold levels for trade decisions, others are used by traders
through various technical phenomena to generate the desired signals. But it is generallyagreed that the best way of using this indicator type is the divergence/convergence
method. Although this method is also prone to emitting false signals at times, it does not
occur as frequently as the other technical events such as crossovers or the breach of
overbought/oversold levels, and is therefore preferred over other styles of analysis.
The indicators are examined in greater detail in their own article.
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Conclusions
Oscillators can be used in ranging and trending markets, and since, depending on the
timeframe, even a range pattern can be broken down to smaller trends, it can also be
possible to use trend oscillators in range trading as well. Creativity and experience are the
main requirements for the successful use of these versatile technical tools. If you seek touse them in your own trading, it is a good idea to do a lot of backtesting, and demo trading
just to get used to the parameters, and to gain an idea of what works and what does not. In
time, your own trading style will develop which will determine the indicator types that you
enjoy most and find most versatile and useful for you. You can begin by studying the
various articles on oscillators at this website.
Momentum Indicators
What is momentum? The term has a specific meaning in physics, and perhaps it is
easier to understand the momentum of prices by considering an analogy. We know that
the speed of a swinging pendulum will vary along the vertical axis, for example, as the
pendulum moves from the bottom to the uppermost extent of its oscillation. Although the
vertical movement of the pendulum is zero at the top of its range (since otherwise it would
fly away), the forces acting on it at the same point is maximum. Conversely, as the
pendulum reaches its maximum speed, the forces generating the speed are at their
minimum. The oscillation of force and speed that creates the observed back and forth
movement in the pendulum is very similar to the oscillation of prices in the market.
As the prices move between successive extremes, the speed of the price action
reaches its maximum at a point where the entry of new traders or money has peaked.
Thereafter, the trend will continue to generate new highs in all likelihood unless the
continuous nature of the price action is broken by an unexpected event, but since the
amount of new buyers or sellers steadily decreases, achieving and sustaining new highs
will be harder. And just as the case with the pendulum, as the driving force of the trend
dries out (timeframe or size of the trend is irrelevant), opponents of the trend will sooner or
later achieve dominance, and will drive the price action in the opposite direction,
replicating tick-tock pattern that is familiar to most traders.
Momentum indicators aim to characterize and portray these swings of the price.
Needless to say, there are no precise, deterministic rules in trading and technical analysis
that can give such satisfactory results as those obtained by the physicist, but the
momentum indicators do help us place the price action into the context of trader
enthusiasm which then enables the determination of the underlying trend's strength.
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How to use Momentum Indicators
There is of course no rock-solid rule about the use of this type of indicator. A capable
trader can create profitable trades even with a most unlikely combination of indicators. On
the other hand, there are some common rules that would help many newcomers by
restricting them to a less volatile, less emotional course of action. This section is mostly
aimed at supplying such a set of rules.
Momentum indicators are not directional indicators. They are most beneficial in the
context of an existing trend already identified by a trader who is unsure about when to join
the same. In other words, we know our destination, and we know the vehicle that we'll
board, but we would like to board it at such a time and under such conditions that the risk of
an accident or crash is minimal. Momentum indicators facilitate this task by telling us when
the trend has enough fuel to burn, so to speak, in volume, trader enthusiasm, and overall
market dynamism. For instance, when using the stochastics indicator, a trader may
choose to exploit a crossover as a sign that the trend has achieved enough momentum tojustify a new trade. In a range pattern, the RSI may be used to determine reversals which
are equivalent to the highs or lows of the pendulum.
Another, and perhaps more popular way of using momentum indicators is making use of
them in light of the divergence/convergence phenomenon. In this case, the trader does not
seek to confirm the price action with a favorable momentum signal, and aims, instead, to
identify the price levels where momentum is contradicting the price action. We had
discussed that the net force acting on a pendulum will be zero when it reaches its greatest
speed at its highest or lowest level. Similarly, the trader seeks out phases of the marketaction where momentum is falling rapidly, while the price action accelerates towards a
point of reversal. When that point is reached, we enter a counter-trend position with the
aim of benefiting from the ensuing correction.
Types of Momentum Indicators
Momentum indicators are both popular and numerous. By definition, they are
also oscillators, and all the general principles that apply to oscillators discussed in
the relevant articles apply to momentum indicators as well. Here we'll mention a few
examples briefly, in order to preserve the completeness of our presentation.
Oscillators: Oscillators such as the RSI, MACD, CCI or Stochastics
indicators are momentum indicators as well. They swing back and forth
between predetermined levels, and can be traded on the basis of the
divergence/convergence phenomenon, as well as the simpler crossover
techniques.
Momentum Indicator
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Rate of Change
An advanced version of the momentum indicator, the rate of change indicator
presents an easier-to-interpret, more refined picture of the market's emotional
configuration, and is useful in any market that displays a strong tendency to oscillate.
The Williams Oscillator is also a momentum indicator.
As its name indicates, this indicator is dedicated to measuring the impulse of the rend. It
is perhaps the most basic type of momentum indicator.
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Many guides and textbooks on technical analysis tend to restrict momentum
indicators to range trading, but it is perfectly possible to use them in trends provided
that one solidifies their signals through confirmation from another class of
indicators that is more suitable to a trending market.
Conclusion
Momentum indicators should be used with other types of indicators that establish
directionality. Combining them with Fibonacci indicators, which generate far more
precise trading points for exploitation, is also a reliable technique. Although there are
a large number of indicators that measure momentum, it is probably not a good idea
to use more than one of them on a single trade. And especially in strongly directional
markets, such as those where developing bubbles are dominant, it is not a great ideato depend too much on momentum readings, even when strong
divergence/convergence patterns exist.
I sincerely hope that you have found this information helpful for your trading.
Should you have any questions or you need any help, please feel free to contact
me. As always, Ill do my best to help you.
Best regards, Anna Forex Monti
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