Best Forex indicators for MT4

Hello, gentlemen traders! Technical analysis is based on the assumption that all information about 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 whether 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 use 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 if technical indicators can give them good trading signals. The whole truth is that technical indicators will not automatically lead 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 help a lot 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 on the chart. You don't need to calculate anything yourself, just go to the MetaTrader 4 menu, click "Insert", 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, indicators have weaknesses: they may be redrawn 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 allow you to save time on conducting market analysis and help you find a trading idea for your strategy.

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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 indicators are different, a trader needs not one, but a combination of several indicators to open a trade. In this article, we will talk about the 3 most popular technical indicators.

1. Moving average is the best trend indicator

The moving average (MA) is a trend indicator that helps determine the direction of the trend on the chart. MA shows the average price value for the selected time period.

In simple words, the moving average indicator follows the price. It helps to smooth out price volatility and get rid of unwanted market "noise", so you focus on the main trend and not on corrections. It should be understood that this indicator does not predict the future price, but displays the current market direction.

Advantages of the moving average:

• determines the direction of the trend;
• finds trend reversals;
• shows potential support and resistance levels.

Disadvantages of the moving average:

• it lags behind the current price (it will change more slowly than the price chart, because the indicator is based on past prices).

Types of moving averages

There are 4 types of moving averages: simple, exponential, linearly weighted, and smoothed. The difference between them is purely technical. We recommend that you use a simple moving average (SMA) or exponential (EMA), since most traders use these lines. The most popular time periods for SMA are 200, 100, 50, and 20 days. A 200-period MA can help you analyze a long-term "historical" trend, while a 20-period MA is suitable for tracking a short-term trend.

How to use the moving average in trading?

The trend is bullish when the price of a currency pair is higher than the MA, and bearish when the price falls lower. Also, note how moving averages with different periods behave in relation to each other.

An uptrend is confirmed when the short-term MA (for example, 50-period) rises above the long-term MA (for example, 100-period). Conversely, a downtrend is confirmed when the short-term moving average becomes lower than 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 trade, 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 to measure market volatility (i.e. the degree of price change). The Bollinger band indicator consists of 3 lines. Each line (band) is a MA. The middle line is usually an SMA with a period of 20. It determines the direction of the trend-just like the MA described above. The upper and lower bands (or "volatility" bands) are shifted by two standard deviations above and below the average band.

In simple words, indiethe Bollinger band indicator builds a channel around the price, which expands and narrows depending on the current volatility. The narrower the range, the lower the market volatility and, conversely, the bands expand when the market becomes more volatile. The price constantly revolves around the midline. It can test levels outside the outer lines, but only for a short period of time, and can't go far. After such a deviation from the center, the price should return back to the middle.

Advantages of the Bollinger band indicator:

• The indicator is really good in a flat (when the currency pair is trading in a range). In this case, the indicator lines can be used as support and resistance levelsfrom which traders can open their positions.

Disadvantages of the Bollinger band indicator:

• During a strong trend, the price may stay on the same Bollinger line for a long time and not move to the opposite one. 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 limit, the more overbought the currency pair is. Simply put, by this time, buyers have already earned on the price increase and closed their deal to make a profit. As a result of overbought conditions, the currency pair stops growing and turns down. An increase in the price above the upper band can be a signal to sell, and a decrease in the price for the lower band can be a signal to buy.

The outer bands automatically expand when volatility increases and narrow when volatility decreases. Periods of high and low volatility tend to follow each other, so the narrowing of the bands often indicates that volatility should increase sharply.

We do not recommend using Bollinger bands without confirmation of other indicators. Bollinger bands are well suited for candle patterns, trend lines, and other graphical tools.

Bollinger bands work best when the market is not trending. This indicator can be an excellent basis for a trading system, but this alone is not enough: you will need to use other tools as well.

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3. MACD is the best momentum indicator

The MACD (Moving Average Convergence / Divergence) measures the strength of the market. This is the most popular indicator among traders. It shows when the market gets tired of moving in one direction and needs a rest (correction).

The MACD histogram represents 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 words, the MACD indicator is based on moving averages, but also includes some other formulas, so it belongs to the type of technical indicators-oscillators. Oscillators are displayed in a separate window under the price chart.

Advantages of the MACD indicator:

• The MACD can be used in both trending markets and flat markets;
• If you understand how the MACD works, it will be easy to work with other oscillators.

Disadvantages of the MACD:

• The indicator lags behind the price chart, so some signals come late and are not accompanied by strong market movement.

How to use the MACD indicator in trading?

1. Sell when the histogram bars begin to decline after a long growth. Buy when the histogram starts to grow after a long decline;
2. Buy when the MACD histogram is belowit is placed above the signal line. Sell when the MACD histogram falls below the signal line;
3. When the 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;
4. If the price rises and the MACD falls (divergence), this means that the price increase is not confirmed by the indicator, and the price increase is nearing completion. On the contrary, if the price falls and the MACD rises, you can expect a bullish reversal.

It is good to use the MACD indicator on the chart, since 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 on this indicator alone.

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Conclusions

There are many free Forex indicators for MT4, and you as a trader should use those that can help you make money. One approach is 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 should first test it on historical data. If it shows profitable trading on the history, you can switch to a demo account or real trading.

Read also the article " With what suwe will start trading on Forex?».