Best Forex Indicators for MT4
What are Forex indicators? What are the forex technical indicators (trend indicators, momentum indicators, volatility indicators)? How to trade using the indicators MACD, Moving Average and Bollinger Bands?
Hello gentlemen traders! Technical analysis is based on the assumption that all information on a trading instrument is reflected in the market price. All you need to do is analyze historical data, such as price or volume, to find out if the rate of a trading instrument will rise or fall in the future. Over time, technical analysts have developed many Forex indicators to help traders solve this problem. We have prepared a guide for you that will help you understand what Forex indicators are and how to apply them in trading.
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What are Forex indicators?
We trade to get a positive result or, in other words, profit. Many novice traders want to know whether technical indicators are able to give them good trading signals. The whole truth is that technical indicators will not automatically drive you to profit, but they will do a great job for you. There is no doubt that an experienced trader can make a profit without using indicators, but they can still greatly help in trading.
Each technical indicator is based on a mathematical formula. These formulas allow you to quickly calculate various price parameters and then visualize the result obtained on a graph. You do not need to calculate anything yourself, just go to the menu MetaTrader 4 , click "Paste" and then select the indicator you want to add to the chart.
Technical indicators make their calculations only on the basis of price - currency quotes. As a result, the indicators have weak points: they can redraw or lag behind the price (for example, the price has already fallen, and only then the indicator gave a sell signal).
The advantage of using indicators is that they save time on market analysis and help you find a trading idea for your strategies .
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Best Forex Indicators
Technical indicators are divided into several groups depending on their purpose (trend indicators, momentum indicators, volatility indicators, etc.). Since the goals of the indicators are different, the trader needs not one, but a combination of several indicators to open a deal. In this article we will talk about the 3 most popular technical indicators.
1. Moving average is the best trend indicator
Moving Average (MA) is a trend indicator that helps determine the direction of a trend on a chart. MA shows the average price for the selected time period.
In simple terms, the moving average indicator follows the price. It helps smooth price volatility and get rid of unwanted market "noise", so you focus on the underlying trend, not on corrections. It is necessary to understand that this indicator does not predict the future price, but reflects the current direction of the market.
Moving Average Advantages:
- determines the direction of the trend;
- finds trend reversals;
- shows potential support and resistance levels.
Moving Average Disadvantages:
- It is behind the current price (it will change more slowly than the price chart, because the indicator is based on past prices).
Moving Average Varieties
There are 4 types of moving averages: simple, exponential, linearly weighted and smooth. The difference between them is purely technical. We recommend that you use simple moving average (SMA) or exponential (EMA), as most traders use these lines. The most popular times for SMA are 200, 100, 50, and 20 days. The 200 period MA can help analyze the long-term “historical” trend, and the 20 period MA is suitable for tracking the short-term trend.
How to apply a moving average in trade?
The trend is bullish when the price of the currency pair is higher than the MA, and bearish when the price falls below. Also, notice how moving averages with different periods behave in relation to each other.
An uptrend is confirmed when a short-term MA (for example, a 50-period) rises above a long-term MA (for example, a 100-period). Conversely, the downtrend is confirmed when the short-term moving average falls below the long-term moving average.
Thus, the moving average indicator shows when to buy or sell a currency pair (buy on an uptrend, and sell on a downtrend). MA will not tell you at what level to open a transaction, for this you will need other Forex indicators. As a result, applying a trend indicator should be one of the first steps in your technical analysis.
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2. Bollinger Bands - Volatility Indicator
Bollinger Bands help measure market volatility (i.e., the degree of price change). The indicator of the Bollinger Band consists of 3 lines. Each line (strip) is an MA. The middle line is usually SMA with a period of 20. It determines the direction of the trend - just like the MAs described above. The upper and lower bands (or “volatility” bands) are shifted by two standard deviations above and below the middle band.
In simple terms, the Bollinger Band indicator builds a channel around the price, which, depending on the current volatility, then expands, then narrows. The narrower the range, the lower the market volatility and, conversely, the bands expand when the market becomes more volatile. The price constantly rotates around the middle line. She can test levels outside the external lines, but only for a short period of time, and cannot go far. After such a deviation from the center of the price will have to go back to the middle.
Advantages of the Bollinger Band Indicator:
- The indicator is really good in the flat (when the currency pair is trading in a range). In this case, the indicator lines can be used as support and resistance levels , from which traders can open their positions.
Disadvantages of the Bollinger Band Indicator:
- During a strong trend, the price can stay on one Bollinger line for a long time and not go to the opposite. As a result, we do not recommend using Bollinger Bands for trending markets.
How to use Bollinger Bands in trading?
The closer the price approaches the upper boundary, the more overbought the currency pair is. Simply put, by this time, buyers had already earned on the price increase and closed their deal to make a profit. As a result of overbought, the currency pair stops growing and turns down. A price increase above the upper band may be a sell signal, and a price reduction for the lower band may be a buy signal.
Outer lanes automatically expand as volatility increases and narrow as volatility decreases. The periods of high and low volatility usually follow each other, therefore narrowing of the bands often means that the volatility should increase dramatically.
We do not recommend using Bollinger Bands without confirming other indicators. Bollinger Bands are well suited for candlestick patterns , trend lines and other graphical tools.
Bollinger Bands work best when the market is not in trend. This indicator can be an excellent basis for a trading system, but this alone is not enough: you will need to use other tools.
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3. MACD is the best impulse indicator
MACD (Moving Average Convergence / Divergence) measures market power. This is the most popular indicator among traders. It shows when the market gets tired to move in one direction and needs rest (correction).
The MACD histogram is the difference between the 26-period and 12-period exponential moving averages (EMA). It also includes a signal line (9-period moving average).
In simple terms, the MACD indicator is based on moving averages, but also includes some other formulas, so it is a type of technical indicator oscillators. Oscillators are displayed in a separate window below the price chart.
- MACD can be used both in trending markets and in flat;
- If you understand how MACD works, it will be easy for you to work with other oscillators.
- The indicator is behind the price chart, so some signals come late and are not accompanied by a strong market movement.
How to use the MACD indicator in trading?
- Sell when the histogram bars begin to decline after long-term growth. Buy when the histogram begins to grow after a long decline;
- Buy when the MACD histogram rises above the signal line. Sell when the MACD histogram falls below the signal line;
- When MACD crosses the zero line, it also shows the strength of bulls or bears. Buy when the MACD histogram rises above 0. Sell when the MACD histogram falls below 0. Note that these signals are weaker than the previous ones;
- If the price rises, and MACD falls (divergence), this means that the price increase is not confirmed by the indicator, and the price growth is nearing completion. On the contrary, if the price falls, and the MACD grows, a bullish reversal can be expected.
It’s good to use the MACD indicator on a chart, because it measures both the trend and the momentum (the rate of price change). It can be the basis for your trading system, although we do not recommend making trading decisions based only on this indicator.
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There are many free forex indicators for MT4, and you as a trader should use those that can help you make money. One approach would be to use a combination of indicators in your strategy. You can select one indicator from each group. You can also use only one indicator, but then it is better to use it after confirming signals on different timeframes . For example, you open a long position if your indicator gives a bullish signal on a five-minute, 30-minute and hourly chart at the same time. Before using any technical indicator, you must first test it on historical data. If it shows a profitable trade on history, then you can go to the demo account or real trading.
Read also the article “How much to start trading on Forex?” .