Do you know the difference between a clueless trader and a professional Forex trader? Of course, the main difference is the level of income: professional traders make Forex their primary source of profit while those who treat the market like it was a casino keep failing. The reason for this is the mindset. A successful currency trader knows that there is a certain amount of knowledge required to approach the complex matter of foreign exchange market. This might include in depth research as well as continuous practice. But above all, the main instrument of an accomplished Forex trader is an ability to analyze the market, build predictions and account for every possible outcome of their trades.
Forex analysis has been around for pretty much as long as the market itself. However, the clear benefit of the nowaday traders compared to the ones back in the day is technology. At this point we can effortlessly gather all the necessary tools to assist us with extracting, organizing and reading the data. All that is left for you to do is to start by finding the right tools and then learn to use them correctly. This guide will provide you with a full overview of Forex technical analysis indicators including some of the information on the following:
- What is Forex technical analysis
- The advantages of technical analysis over fundamental analysis
- Forex market charts and patterns
- A full review of the most popular trading indicators
- Frequently asked questions about Forex indicators
- How to practice using indicators for free
- What is the best Forex indicator
What is Forex technical analysis
The currency exchange market can be analyzed through two approaches: technically and fundamentally. Forex technical analysis is the purely mathematical way to examine the price charts to find patterns and build the trading process accordingly. The concept of modern technical analysis of the currency markets tracks back to the end of the 19th century, when the Wall Street Journal founder Charles Dow introduced a theory named after himself. According to Dow’s theory the price of an asset is a full reflection of the formation of its value. Simply said, as long as you know the price you do not need to look into any additional aspects that may have influenced it.
Additionally, Dow has suggested that the price always moves in trends. As in if it started to rise, it will most likely keep rising for a certain period of time until it reverses and starts going down. The technical analysis focuses on capturing these trends and using them for the trader’s advantage. Forex is known to run it patterns and repeat its own history, which serves as a foundation of technical analysis: observe, learn from it and plan your future actions accordingly.
The other type of Forex analysis - fundamental, sort of look at the side that technical analysis ignores. Specifically, the factors that caused the market to behave the way it does. This normally includes the detailed study of current political, social and economical situations across the globe. Currency trading that based primarily on fundamental analysis definitely has its advantages, however, a large amount of traders would argue that technical analysis approach is more superior. Some of the advantages of technical analysis over fundamental analysis are:
- Technical analysis can be mastered by anyone, even by traders with zero previous knowledge of the market. While fundamental analysis has to be performed by professional analysts with deep understanding of the world's politics and economy. The best solution for those who would like to implement fundamental analysis in their trading is to get the free daily updates provided by market experts.
- Unlike fundamental analysis, technical analysis can be fully automated. Since all of the processed are strictly mathematical, this process can be performed by specifically designed pieces of software such as online analysis services or automated trading robots.
- There is a wide variety of tools when it comes to technical analysis. The different options included in Metatrader 4 platform to work with charts as well as over 50 easy to use indicators can make the life of any trader much easier. Best thing about having so many choices is that there is an option to alter your analysis process to your personal trading style and preference.
- If you perform the analysis correctly the positive results are nearly guaranteed. As long as you account for all possible variables, you should be able to work out a comprehensive action plan to achieve your goals. Plus, there is always an option to choose one of the existing trading strategies based on Forex technical analysis.
Technical analysis is a great practice to be used during currency trading. As you might have already gathered by now, the key to effective market analysis is knowledge. So it is important to understand all of the necessary aspects of Forex analytics before attempting to read the charts and build a strategy. Now, let’s get a little more technical and discuss the exact procedure of performing technical analysis of the Forex market.
Forex market charts and chart patterns
To analyze the market the trader first need to gather data to work with. The information on the chosen currency pair is usually presented on the chart - a graphic model of all price values in the defined period of time. The three most popular types of Forex charts are: line, bar and candle. Here is a brief overview for each of these:
- Line charts are exactly what they sound like - linear graphs where the line connects all the closing prices within the chosen timeframe. While some traders use the line charts as their main source of information, it is strongly advised to use it in combination with another chart type for a cross check.
- Bar charts are a little more complex as they consist of more information. Every bar is a vertical line which can differ in length with small horizontal markings on the top and on the bottom. The markings represent the highest and lowest priresearch ce values at their open and close. Judging on the location of the markings and patterns formed by several bars, a trader can evaluate the current situation at the market and plan the following trades.
- The most popular chart type is candlesticks. The name comes from the way elements of this chart look - vertical rectangles with small vertical markings at the top and bottom. The way candles work is similar to bars: they can indicate the lowest and highest values at the open and close of each period. As you start to operate with candlestick charts you will notice some of them referred to as bullish or bearish. These names are simply a way of identifying what was higher: the opening price or the closing one. That way, bears occur when the opening price is higher and bulls when closing one is higher.
The main way of manipulating charts is through time frame settings. Timeframe is a period of time which the trader wants to examine. The chart will adjust accordingly. For example on the day chart one candle can represent an hour, while on the one hour chart it will reflect one minute. The specific time setting is up to each trader and is usually indicated by the rules of specific trading strategies.
There are also some additional tools that can help traders with reading the chart. Some of them are basic drawing tools like pen or line, that can add elements to the existing chart visible only to the current user. Obviously, the drawing will not affect the actual market, it is simply a way to highlight the important part of the chart to understand it better. The other category of supporting tools for the trading charts is a little more complex. Next we will discuss all the main points on Forex technical analysis indicators including some of their examples.
Forex technical analysis indicators
The technical indicators also known as Metatarder or MT4 indicators are widely used across the market, so what is MT4 indicators and how do they work? They serve as mathematical calculations of various aspects of the market like volume, volatility and the historical price values. There are many indicators to choose from and sometimes they can even be used together for better results. The best strategy for choosing the right indicators for your trading is to start by setting clear goals and settling on one or two trading strategies. Once you have an action plan you can move onto choosing the right tools for its completion.
The main purpose of indicators is to locate the trend and validate its truthfulness. Technical indicators can be divided in four groups: trend, momentum, volume and volatility. Below we will break down each category with some examples.
As we know, a trend is a quality of the market that makes it move in a certain direction for a period of time. Trends can be long term and short term. They can also be influenced by the amount of attention they get. For example, if a large number of traders makes the same decisions about a specific trend it can both strengthen it and reverse it, depending on the character of trades. Trend indicators locate and measure the strength of ongoing trends by calculating the average values. For example, if the price keeps gradually exceeding its own average value this can be indicated as a bullish trend and signal the trader to act accordingly. Some of the most popular examples of trend indicators are:
- Moving Average (MA). MA is an indicator that connects the average values of the currency during the set time period. The common use of this indicator is to smooth out the short term hiccups at the chart and look at the ongoing trend clearly. Plus, in the falling market a moving average can indicate support and in the rising - resistance.
- Moving Average Convergence Divergence (MACD). MACD goes further than MA and compares the long term trend with a short term trend. This indicator is often used to locate the entry and exit point for an upcoming trade. Those points are detected by the cross overs of the indicator’s lines.
- Parabolic Stop and Reverse (Parabolic SAR). The parabolic SAR is uniquely calculated to each particular trend and is used to predict the possible reversals in the ongoing trends. In bullish trends the indicator appears below and then moves towards the graph, and in the bearish trends the opposite - appears above and moves downwards to meet the reversal point.
- Detrended Price Oscillator (DPO). This indicator is a handy tool for short term traders like scalpers as it focuses on eliminating the long term trends and working only with the short term ones. It is very useful in determining the oversold and overbought levels.
In Forex technical analysis, momentum stands for an overall change rate in the price value of a taken currency. The extreme highs and lows of the momentum can signal the upcoming oversold or overbought scenario. Momentum indicators are designed to measure the speed of the price change by comparing the prices at various moments of time. The discrepancy between the momentum indicator and a price value can be a signal for a coming change in price. Some of the momentum indicators are:
- Relative Strength Index (RSI). RSI is designed to measure the greatness of recent changes in price values. Its most common use is to asses the overbought and oversold conditions. It is important to remember that market is driven by traders and sometimes the graph will keep moving up even after RSI signaled the market being wither oversold or overbought. Therefore, the best strategy for this indicator is to use it in combination with others.
- Stochastic Oscillator. This indicator works within the space between the support and resistance levels. It operates by comparing the current price value in relation to its range in the specific time period. Stochastic oscillator is used to predict the possible turning points and just like the RSI it is advised to use this indicator as a supporting tool.
- True Strength Index (TSI). TSI can both spot the trend and identify the oversold and overbought conditions. Positive TSI indicates a momentum edge for buyers, while negative TSI - for sellers. It is also possible to predict the trend reversals with the help of this indicator. It can be done by spotting bullish or bearish divergences as they anticipate an upcoming trend.
Volume in Forex can also be described as turnover or simply popularity. It defines the amount of lots traded for either a specific currency or the entire market in the certain period of time. The volume dictates the strength of the moves each trader makes. By that logic, the trades completed during high volume periods will be more significant that those processed during low volume. Professional traders advice using the bar charts for calculating volume as it can be done easier in that set up. The volume indicators are programmed to measure the power of an ongoing trend by smoothing out the raw volume. The higher the volume the stronger is the trend. Here are some examples of volume indicators:
- Ease of Movement (EMV). This indicator works by relating the change in the current price value to the currency’s volume. EMV is used to determine the entry and exit points as well as to decide what kind of position to open: short or long. It is generally advised to ignore the signals of this indicator during the periods of low volume.
- On Balance Volume (OBV). OBV produces similar results as EMV through a different calculation process. This indicator also relates the price change to the overall volume by determining whether the chosen period is up-volume or down-volume. The theory behind OBV is that it is able to move a couple steps ahead of the price change and therefore indicate entries and exits.
- Force Index (FI). The founder of FI, Alexander Elder, believed that there are three essential elements to an asset’s value movement: trend direction, the extent of the trend and volume. This indicator combines all three and is used to reinforce the ongoing trend as well as predict possible reversals and suggest corrections.
Volatility of the forex market is an expression of the amount of risk and uncertainty associated with the chosen currency pair. It is measured by calculating both the number of changes and the size of them. For a trader high volatility means that the price can leap in any direction at any point of time, therefore is is traditionally associated with high risk trading. However, this does not necessarily mean that high volatility is negative. Day traders are and other short term traders tend to benefit from highly volatile conditions as it is the only way for them to make a visible profit. To trade wisely during the periods of high volatility the appropriate indicators are used. The volatility indicators are designed to measure the rate of price changes disregarding of the trend direction. They are commonly used to locate the point where the market might change the overall course. Some examples of volatility indicators:
- Standard Deviation (SA). This indicator is used to predict the upcoming volatility for the chosen currency pair. It measures the number of variations in a set of price values. The lower SA indicates for less volatility, while higher SA indicates for the price range to spread out more aka high volatility.
- Bollinger Bands (BB). This indicator consists of three lines or bands: the MA, and two bands that connect the highest extremes and lowest terms respectively. The bigger the range between the additional bands - the higher volatility. BB can also be used to identify the support and resistance levels.
- Average True Range (ATR). ATR is an indicator that measures volatility with a disregard of an ongoing trend. This is handy when the volatility indicates low but the market keeps on trending higher and vice versa. Since the nature of the market is repetitive we know for sure that the low volatility will be followed by the high one, and that is how traders make profit using ATR.
As we now have gathered most of the info on what is MT4 indicators and how they can be used, it is time to move on to the next section. In here, we will briefly answer some of the most frequently asked questions on trading indicators, including:
- How to install indicators on MT4
- How to edit an MT4 indicator
- How to combine indicators in MT4
- How to remove indicators from MT4
- How to practice using indicators risk free
- What is the best Forex indicator
FAQ on Forex technical Analysis Indicators
How to install indicators on MT4
Metatrader is known for being both highly technically sophisticated and user friendly. That is why any process performed in MT4 is very straightforward and usually doesn’t take up much of your time. Here are the exact steps to take on how to install indicators on MT4 for PC users.
- Download the indicator and remember its location on your computer
- Inside the platform open the Data Folder though the File menu
- Then follow the path MQL4 Indicators
- Copy all the indicator files from your computer and paste them in the Indicators folder
- Restart the trading terminal
- It’s ready to go!
How to edit an MT4 indicator
More often than not when traders search for an answer to how to edit an MT4 indicator they mean how to adjust the indicator’s settings. The different settings of each indicator provide different results. By adjusting the specific values and ranges you can extract the most accurate information to be used in analysis. Here are the steps on how to edit MN4 indicators:
- Open the MT4 and locate the Navigator menu
- Under Navigator select Indicators or Custom Indicators
- Choose the indicator you want to adjust from the list
- A small window will pop up with every parameter available for adjustment, you can also change the visualization of certain indicators to fit your preference
- Change the setting and press OK or press Reset to come back to the default setting
How to combine indicators in MT4
As we have learned above, some indicators work better in combination with others. Sometimes you can use an additional indicator to get extra data or to confirm the rightfulness of the initial indicator. To do that you can either use each indicator one at a time and compare the results using screenshots or multiple screens. Alternatively, some indicators will allow you to use several of them at the same time. This quality will be described in each indicators overview. How to remove indicators from MT4 Sometimes you need to clear up the working space and remove an indicator form the chart. This can happen when you are looking to start working with a different indicator or just trying to avoid any distractions. Here are the simple steps on how to remove indicators from MT4 chart:
- Right Click anywhere on the chart
- Select the Indicators List and then the indicator you want to remove
- Click Delete
How to practice using indicators risk free
The best way to practice any of your trading skills including the mastering of technical indicators is through the free demo account. Demo accounts copy actual trading accounts which means they provide access to all of the same features, charts and indicators. If you want to get to know a new indicator or play around with the settings without risking any of our personal funds - demo is the place to do that.
What is the best Forex indicator
This is a trick question, since as you know by now every trading style and strategy requires different approaches and therefore different indicators. That is why the answer to what is the best Forex indicator is the one that is working for you. A trader has to be comfortable with using an indicator and be able to read the result data properly. Luckily, trading is a skill that can be mastered through some studying and practice. Anything is possible for those who are patient, calm and keep their focus on the big picture.