Computer indicators are a relatively young area of technical analysis, but today such tools are the most popular, especially among novice traders. For the most part, indicators are simple and clear, making the trader's work as easy as possible and giving clear signals to enter the market. Let's take a closer look at what other advantages computer indicators have and how to use them most effectively in forex trading.
Technical analysis indicators: what are they and what are their key features
Technical analysis indicators, or computer indicators, are tools that make certain calculations according to given formulas based on the indicators of the price chart, and then automatically give the result. Most often, indicators look like graphical constructions (lines, histograms, etc.), which are automatically plotted on the chart.
Each indicator is based on a formula in which the values of the price chart act as variables. Some parameters can be configured by the user. After all parameters and values are determined, the indicator is superimposed on the chart, and the trader receives a clear signal to enter the market or exit the transaction.
Automatism in calculations is the main feature of computer indicators. Thanks to this, the most complex constructions can be applied to the chart in a matter of seconds. It was thanks to the advent of computer analysis that it became possible to create automatic trading systems, various advisers and robots.
Types of indicators
There are several categories of technical analysis indicators that are used for trading both Forex instruments and CFDs on stocks, commodity futures, and even cryptocurrencies. Instruments of each category perform a specific function, and that is why trading with a strategy that includes different kinds indicators.
Trend indicators
Trend indicators allow you to determine the current direction of the trend, as well as notice the moment of a trend reversal in time. As a rule, trend indicators are built directly on the chart and move parallel to the price, intersecting with it periodically and changing their position. Such intersections most often signal a change in trend.
In addition to determining the prevailing trend, and therefore a signal on which side to open a deal, trend indicators will help you exit the market at the right time. As soon as the price reverses and changes its direction, the trend-following indicator reports this, and the trader has time to close the position before the profit from the movement is lost.
Oscillator indicators
Oscillators are the second most popular category of indicators. Usually they are set in a separate window below the chart, and their readings are relative. Like trend indicators, oscillators are built based on the price, but their own values do not correspond to the price ones, and fluctuate in a certain range (most often 0/100 or +100/-100).
Relativity of indicator values is the main feature on which the most effective trading strategies are built (for example, on divergences). Most often, oscillators help to identify the moments of overbought / oversold markets, as well as the strength of the trend. If trend indicators help a trader understand when to open a trade, then the oscillator will also tell you when it is better to refrain from entering the market.
Volume indicators
In Forex, unlike the stock market, it is almost impossible to determine real trading volumes, so volume indicators have their own characteristics. Some instruments are analyzed by tick volume - the frequency of price changes over a certain time interval. This allows you to estimate the intensity of trade, although it does not provide information on monetary volumes. Some brokers have their own volume indicators that allow you to objectively assess the positions of traders of a particular company, but do not provide information about the entire market.
In general, volume indicators help to determine the interest of investors in a particular asset, as well as to understand whether the price change is caused by the real interest of investors or purely speculative manipulations.
Information indicators
This category includes instruments that provide users with information, but do not give direct signals to enter the market. For example, an information indicator can be a widget with the size of the current spread (in the MT 4 trading platform, the spread has to be calculated independently, which takes time). Also, an information indicator is a mini economic calendar, which informs about the release of important news directly in the trading terminal.
Perhaps these are not all categories of indicators, since this area of analysis is constantly evolving, new tools are being developed, and existing ones are being modified and gaining new capabilities. However, these categories are the most basic, and it is with indicators of these types that a novice trader should start studying computer analysis.
The most popular technical analysis indicators
The moving average is rightfully considered the most popular and main indicator of technical analysis. More than half of the strategies with the use of indicators also include MA.
At the same time, the moving average is the simplest indicator. This is a curved line, which at each point is the arithmetic mean of a certain number of price values for a given period. The MA is an average indicator of the price itself, and its direction on the chart is considered a more objective trend.
The MACD indicator belongs to the category of oscillators, although it is sometimes considered a trend indicator. MACD is built in a separate window below the chart, and determines the degree of convergence and divergence of two moving averages with different periods. This discrepancy is displayed as a chart, and the higher the bars, the greater the distance between the MAs, which means the stronger the trend.
Histogram bars also determine the direction of the trend (up or down), and their intersection with the moving average of the indicator itself gives the basic signals. Also, a strong signal of this indicator is a divergence with the price chart.
Another popular oscillator is the Stochastic Oscillator. It consists of two lines, one of which shows the ratio of the current price to the previous values for a certain period, and the other is the moving average of the pen.
Stochastic is one of the sharpest oscillators. It is convenient to use it as a filter for a trend indicator and filter out false signals, however, trading on the Stochastic Oscillator alone can lead to negative dynamics and losses.
Bollinger Bands is a trend indicator consisting of a moving average and two lines that are dynamic support and resistance levels. In addition to the direction of the trend, BB also determines the volatility of the asset.
The main signal of this indicator is the price chart crossing one of the extreme Bollinger Bands lines. According to statistics, the price is within the range limited by the lines 95% of the time, so their intersection signals a strong deviation, which may soon be followed by a pullback.
The Relative Strength Index (RSI) oscillator is similar to the Stochastic in many ways, but its intra-range fluctuations are quieter and signals are rarer. In addition, this indicator consists of one line and does not have its own MA.
RSI signals are similar to Stochastic signals: exit from overbought/oversold zones, divergence with the price chart. The indicator is most effective as a filter.
Strategy EMA + RSI + Stochastic
In order to better evaluate the effectiveness of technical analysis indicators, consider trading strategy using several tools at once.
To do this, you need to set on the chart 2 exponential moving averages with periods of 5 and 10, RSI with a period of 14 and a level of 50, as well as a Stochastic with parameters of 14, 3.3 and levels of 80 and 20.
Trades are opened under the following conditions:
- If the fast EMA crosses the slow EMA from the bottom up, the RSI is above the 50 level, and the Stochastic has not risen above the 80 level, a buy position is opened.
- If the fast EMA crosses the slow EMA from top to bottom, the RSI is above the level of 50, and the Stochastic is not oversold, a sell trade is opened.
EMA 5 crosses EMA 10 from top to bottom
RSI below level 50
Stochastic is not oversold
The exit from the transaction can be carried out on two of three reverse signals: for example, if after selling the RSI rises above 50, and the fast MA crosses the slow one from the bottom up.
The strategy is better suited for medium-term trading on H4-D1 timeframes.
Advantages and disadvantages of computer analysis tools
Technical analysis indicators are a huge category of tools, each of which has its own advantages and disadvantages. Each type of indicator has its own characteristics: for example, trend indicators are often late, but their signals are more reliable than oscillator signals, which are considered to be leading ones.
Most indicators have one main advantage: thanks to automatic calculation, they greatly simplify the task for traders, delivering clear and unambiguous signals. Some indicators generally release the trader from the duties of an analyst, and all that is required of him is to press “buy” or “sell” in time.
On the other hand, the more automated and narrowly targeted the indicator, the faster it becomes obsolete and ceases to show positive dynamics. This is where the stereotype arose that absolutely profitable systems do not exist - in fact, they do exist, they just remain profitable for a very short period of time. On the other hand, graphical and candlestick analysis, which requires traders not only to have rich experience, but also a certain amount of creativity, has been relevant for many decades.
Indicators will be useful for novice traders as a starting tool, as well as for lovers of automatic trading. Traders with basic programming skills often create their own indicators and modify existing ones. Thus, they gain an advantage over other bidders and, albeit for a short period, have the opportunity to earn more with less risk.
Trading in financial markets involves high level capital risk. In order to reduce risks, it is recommended to strictly follow the rules of money management and always set Stop Loss. All decisions that a trader makes while working on Forex are his personal responsibility.
Technical analysis indicatorsGood day, readers of the trading blog, together with graphical figures, form the foundation of classical or Western technical analysis. In fact, they are created based on price and trading volumes. security and measure factors such as supply and demand, trends, volatility, momentum. They are very popular with active traders as they help identify short- and medium-term changes in price direction. On this page, we will look at a few concepts that a novice trader using technical analysis indicators should know in order to use them consciously and correctly.
Dow theory says that the market or price takes everything into account. This is the basic postulate on which the work of an active trader in the stock market is based. From this statement it emerges that any technical indicator that you would not use cannot show and tell you more than the price itself and its dynamics.
In other words, all indicators that exist in technical analysis base their work on the stock price. They compare its current strength and direction with certain periods in the past and give you the following conclusions:
- The stock enjoys an increased demand or supply. In other words, it is trading near its support or resistance level.
- The action is in trending or consolidating. That is, where the price is moving: up, down, or closed by buyers and sellers in some kind of trading corridor
- Strength or Momentum, with which the price moves, increases or decreases. If it rises, it means that the stock is actively traded and is somewhere at the beginning of a new trend. If it fades, it means that traders are losing interest in it and a change in trend on the chart may occur.
- Which volatility stock? I know 100% (an article on one site with active commenting) that some people consider technical analysis indicators that determine volatility to be useless. But only people who are not involved in trading can say this. Read " Position Sizing - Taming Volatility».
I will bring the above to you with examples. Let's take one of the most simple and well-known indicators - a simple moving average. On the chart, this is a line that, by comparing the current stock price (closing, opening, etc.) with the previous one for a certain period, builds its average value. With its help, we determine the direction of the trend.
The indicator - the relative strength index (RSI), compares the current strength with which the price is moving with the previous one. Shows supply and demand for a stock (by overbought and oversold levels), as well as the beginning or end of a trend (by convergence and divergence).
The ATR (Average True Range) indicator averages a trading range (candle high minus candle low and divided by 2) over several days. Shows volatility.
In each example, all technical analysis indicators were based on current and past prices. This means that more than the stock chart itself, no indicator will show you.
Types of technical analysis indicators
You can hear and see different indicators: volatility, trend, momentum, strength and others. But all of them are either lagging or leading.
- Lagging indicators- mainly follow the trend and therefore are also called trending. They have rather low prognostic properties. Their most famous and used representatives are moving average and Bollinger bands. main feature lagging indicators: they work well in a trending market and poorly in a sideways one.
- Leading indicators– for the most part, they are represented by oscillators and “predict” trend reversals. Of course, they cannot outpace price and new market information, as some people think. They just have a slight forward bias, which gives them the opportunity to predict the next action of the stock. But in this regard, they also have more false signals than trend indicators. Their main feature is that they work well on a side market (range) and poorly on a trending one. Representatives: stochastic indicator and RSI.
How to use indicators
For whom, in general, are indicators created? Who uses them? Since they do not carry any information about the profitability of the business, its profitability and other fundamental indicators of the stock, long-term investors are clearly not interested in them. That is, technical indicators are used mainly by active traders. With their help, they analyze the price dynamics on the charts.
How can active traders use technical analysis indicators in their trading? There are two ways.
First way– trade based on indicator signals. For example, if a short (let's say 50-period) moving average crosses a long (say 200-period) moving average up, then we buy, if it goes down, we sell. Or the oscillator shows oversold - open a long position, and overbought - short.
There are a great many such signals from different indicators, according to which all kinds of strategies are created. But the question arises: if the market takes everything into account, and the stock chart tells us more about the price dynamics than any single indicator, then is it worth basing your trading on their signals?
Second way– use indicators to indicate securities that meet our trading criteria. Decisions on opening a position should be made solely on the basis of price dynamics.
For example, I know that near the support level there is increased demand to be bought, and near the resistance level there is supply to be sold. I know trending stocks make the biggest profits. I know that everything important movements prices are supported by high trading volumes.
That's why I'm looking for relevant stocks using: moving averages, ADX indicator, technical analysis patterns (reversal or continuation), but I base my trading decisions on candlestick analysis. For more details: read " Swing trading strategy».
Conclusion
They are essential tools for an active trader. For example, it is hard to imagine the creation of an automatic trading system or a robot without their use. But still, there is nothing more important in the market than the price itself. If you carefully analyze several thousand blank charts, you will see for yourself that you only need technical analysis indicators to quickly filter the necessary stocks. Trading Blog thanks for your attention. Be successful!
trend indicator is an auxiliary tool for technical analysis that helps to determine the exact direction of the trend: either an upward or downward movement in the price of a trading instrument. Often, trend indicators, although a little late, are still the most reliable signals that a trader can safely rely on.
Trend-type indicators smooth out price fluctuations during signal formation by averaging the data. This gives the trader the opportunity to visually determine which trend will be present in a particular time period.
Below are the best trend indicators that are popular among traders due to their ease of installation and use.
The Best Forex Trend Indicators
- Moving Averages. Moving averages are perhaps the best trend indicator used by most traders. Moving Average is often advised to beginners as this indicator helps to understand the principles of technical analysis of price behavior. Moving averages also help to find out the strength of the trend. The average price value is determined by this indicator as the sum of all values of the settlement trading period (day, week, month, etc.) divided by the number of days, weeks, etc. Bollinger Bands.
- Bollinger Bands are an envelope that expands when the volatility of a trading instrument increases. Accordingly, it narrows as volatility decreases, which informs the trader that the market is in a flat. When the price is outside the envelope (goes down) - this is a signal to buy. And vice versa, if the price is outside the envelope at the top, then this will be a sell signal for the trader.
- Alligator Indicator. The indicator called Alligator consists of moving averages. This analytical tool is most often used in trading system Bill Williams. The Alligator Indicator signals that a new trend has begun when the moving averages begin to diverge in different directions. If the moving averages are intertwined with each other, then this means a sideways trend. In other words, intertwined moving averages indicate a flat.
- ADX indicator (Average Directional Movement Index). ADX is a directional movement index. This indicator shows the presence of a pronounced trend strength. The higher the value of the indicator, the more likely it is that the current trend will continue. Accordingly, the lower the indicator, the more likely it is that the trend will change. The indicator consists of 3 lines that reflect the volume of buying and selling. They are called "+DI", "-DI", ADX. The greater the difference between +DI and –DI, the greater the value of the ADX indicator.
- Parabolic indicator (Parabolic SAR). This indicator can correctly determine the direction of the main trend, as well as identify the moment of closing open deals if a new trend is emerging.
Technical analysis indicators appeared quite a long time ago, and many of them were used even before the general computerization. For example, the notorious Ichimoku was developed in Japan in the 30s of the twentieth century. Naturally, at that time there was no talk of automatic calculations. Therefore, the work with the indicator was carried out exclusively manually.
Technical analysis indicators are algorithms that allow you to obtain data on future prices using quotes data for a certain period of time.
Each indicator of technical analysis is based on a certain formula. It is with its help that the calculation takes place. Depending on the type of indicator or its purpose, the formula may vary. For example, one calculates the average prices for a certain period, the other calculates the closing or opening prices of the market, and so on.
With the advent of computers and large-scale computerization, indicators gradually migrated to computers. Now all calculations are carried out automatically, which greatly facilitated the work of the trader.
Technical analysis indicators are very popular among traders. This is partly due to the fact that all the calculations are carried out by the machine. The trader receives only the result, which he puts into practice. The result of the work of most indicators (namely, most, but not all) is to receive a specific signal for action - buying or selling an asset.
The basis of the indicators
Oscillators become useless during periods of trends. Accordingly, it is necessary to use some kind of tool in order to understand when the work in the range ends and trading begins within the trend. (Gator Oscillator)
(Market Facilitation Index, MFI)
How to work with indicators
Technical analysis indicators are needed mainly for short-term traders who prefer to work in a short time frame. Long-term investors are not interested in using technical algorithms, as they prefer fundamental analysis.
On our website, you can connect different indicators and see how they work, but trading terminals from brokers, of course, have more features, including a larger set of indicators, as well as the ability to connect third-party, new indicators.
In order to start using this or that indicator, it is necessary, at a minimum, to study the information about it and understand how its formula works. This is very important, as it will allow in the future to determine in which situations it is worth considering the indicator signals, and when it is better to abstain.
Most of the indicators can be customized according to your preferences, for example, change the indicators of intervals, periods. As a result of such manipulations, it is possible to significantly change the indicator readings, making it more or less sensitive.
There are no ideal settings, so the trader will have to adapt to a certain situation. In general, they perform well on the default settings, and if you want to change the settings created by professionals, you need to understand exactly what you are doing.
Technical analysis indicators have long been an integral part of it. They form the basis of not only manual strategies, but also automatic advisers. No deal on the professional market is complete without technical analysis and indicators.
Technical analysis indicators provide many possibilities, but it is important to remember the successful component - always combine different indicators to get the most reliable signal.
If one indicator tells you about a trend reversal, that's good, but when 2 more indicators tell you about it, that's even better.
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