Using Indicators in Technical Analysis

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The analyses that trader carries before making a trading decision divided into two main types: technical analysis and fundamental analysis.

Fundamental analysis is a method of evaluating and forecasting the behavior of the security by examining related economic and qualitative factors. In other words, Fundamental analysis studies any factors that might affect the behavior of the asset price.

In its turn, Technical analysis studies statistical patterns in the past price movements. Technical analysis uses a wide variety of statistical methods to analyze and predict price behavior. This article focuses on main principals of Technical Analysis.

 

Technical Analysis

Technical Analysis is used to determine current state and predict future behavior of the trading instrument. In general, any tradable instrument which is subject to forces of supply and demand can be analyzed.

First attempts of Technical Analysis relate to Japan rice traders in the 18th century. In those days rice prices were represented as candlestick chart. Trader named Munehisa Honma, has developed method of analysis of the formations of this candles. This type of analysis now called Candlestick Chart Analysis. Steve Nison described this technique in his book, Japanese Candlestick Charting Techniques. Since the birth of the financial markets, numerous traders and analysts have developed and adapted a variety of Technical Indicators.

An important part of Technical Analysis is so called Technical Indicators. Technical indicators are functions, programs or algorithms, based on statistics, which helps the trader to see more complex and full picture of the market. All variety of indicators, despite some exceptions, is divided into three main types: trend indicators, oscillators, volatility indicators.

 

Trend indicators

There are two main stages of the market: trending and stagnating. The Trending state means that price moves from one level to another. In other words, significantly changes. Stagnating state implies that price moves in boundaries of the relatively narrow channel. In other words, price moves horizontally and do not change significantly.

Trend Indicators helps to identify current trends of the asset. Thus, the security price can be in Trending and Stagnating states at the same time on the different timeframe levels. For instance, EURUSD can be trending on the daily chart and stagnate in on the 5 minutes chart. Thus, Technical Indicators can be applied to different time frames and have different readings. The main Trend indicators are Moving Averages, Average Directional Movement Index, Bollinger Bands, Parabolic SAR.

Technical Analysis Trend Indicators

On the chart: Moving Averages, Average Directional Movement Index, Bollinger Bands, Parabolic SAR.

Oscillators

Oscillators are the type of indicators that normalize price movements for the particular period. Such indicators mainly used on the stagnating markets, and depends on from past extremums of the price. To sum up, oscillators show price position about particular extremums. Such information is useful for determining possible turnaround points or overbought and oversold states. Popular oscillators are Relative Strength Index, Stochastic Oscillator, Moving Averages Convergence/Divergence Oscillator.

Technical Analysis Oscilators

On the chart: Relative Strength Index, Stochastic Oscillator, Moving Averages Convergence/Divergence Oscillator.

Volatility Indicators

Volatility indicators show the magnitude of price fluctuations for the particular timeframe. With such indicators, Trader can calculate a certain level of losses and profits. Due to Volatility indications market are divided into high volatility and low volatility states.  Volatility indicators: Standard Deviations, Average True Range, Bollinger Bands.

Technical Analysis Volatility Indicators

On the chart: Standard Deviations, Average True Range, Bollinger Bands.

Trading Platforms

There are many programs for Technical Analysis and trading platforms. The most popular and straightforward platforms are: MetaTrader 4, MetaTrader 5, fxTrade, TradeStation. Depending on your broker you will get different platforms. Nevertheless, beginners will easily find brokers with free MetaTrader4 platform and Demo account.

Here an example of using Moving Average Indicator on MetrTrader 4 platform.

The MetaTrader 4 platform itself. Indicators folder highlighted by red line.

MetaTrader4

Indicator folder has different groups and indicators. We will use Moving Average indicator, in Trend folder.

MetaTrader4 2

 

 

 

 

 

 

 

After dragging this Indicator on our chart Parameters, a window will appear. Here we can choose Period; Shift of the Indicator, Calculation Method (MA Method) and Type of the data (Apply To).

MetaTrader4 3

After choosing parameters, we will see our Moving Average on the chart. For clarity, we draw three Moving Averages with periods 14, 24 and 60.

MetaTrader4 5

The principle of operation and the basic elements are same among trading platforms. Thus, having mastered MetaTrader4 will help you learn other trading platforms easily.

 

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