MetaTrader - How to Use Indicators
In the jungle that is the Forex market, traders need a guide. Trading is like walking in a dark jungle - how will you know you are nearing the edge? Indicators! Indicators are like a guide in the Forex market. Raw price action can sometimes be difficult to decipher; thus, it is important that traders learn how to use indicators efficiently. Indicators will give meaning to the current asset price behavior and help in determining when and where it is less risky and potentially more profitable to execute trade orders in the market.
Most indicators usually print their values after the price, which essentially means that they are lagging. Though lagging, indicators will still provide valuable information to traders about asset price behavior. By learning how to use indicators efficiently, traders can avoid the major pitfall of lagging indicators, which is to receive late or invalid signals.
It is important to learn how to use indicator combinations so as to analyze the important price aspects under different market conditions. Indicators measure different price elements such volume, trend, volatility, momentum and even cyclical behavior. When deciding how to use indicator combinations, it is important to pick tools that complement each other. That is, indicators that serve different purposes but support each other.
When using indicator combinations, there is always the danger of analysis paralysis. This is mostly due to traders using too many tools that can give conflicting trading signals, almost all the time. Over optimization can also create indicator redundancy; forcing traders to literally wait forever for tradable signals. Additionally, using multiple indicators of the same kind can just limit effective price analysis. For instance, using two momentum indicators at the same time can deliver different overbought or oversold signals.
Finally, when making a decision on how to use indicator combinations, it is always wise to know that more is not always better. The most important factor is to get the right combination in relation to the prevailing market conditions.
The Best Indicator Combinations
Here are examples of how to use indicator combinations to improve timing and precision when trading in the Forex market:
Fibonacci and Trendlines
Fibonacci is an excellent tool that tracks and predicts future price movement in trending markets. That is why it can perfectly complement another tool that is ideal for trending markets - trendlines. Using this combination, trendlines can provide traders with the general trend bias as well as help in identifying price patterns. The Fibonacci tool usually derives Retracement and Expansion levels. In a trending market, Fibonacci retracements will help traders pick out optimal trade entry points (preferably those with a confluence with the trendline) as well as ideal stop loss placement levels; whereas Fibonacci extensions will help in establishing definitive price targets (ideal Take Profit levels).
Relative Strength Index (RSI) Indicator and Trendlines
This is another versatile combination of how to use indicators efficiently. The RSI is a momentum indicator that not only indicates overbought and oversold conditions, but also qualifies trends. When the RSI level is below ‘30’, it implies oversold conditions, while above ‘70’, it implies overbought conditions. For instance, if the trendline indicates bullish pressure, traders will apply a Buy strategy in the market, but will look to close their positions if overbought conditions extend.
Using this indicator combination, traders can also determine when a trend is more momentous. This is done by watching the RSI centerline (level ‘50’). If prices are above the RSI 50 level, for instance, and the trendline confirms an uptrend is in place, traders can implement an aggressive Buy strategy because momentum is backing the bullish pressure.
Indicators help traders decipher asset price action in the markets. But when used as standalones, they may not be adequate. To improve timing and precision when placing Forex orders (entries, stops and take profits), it is very important to learn how to use indicator combinations effectively so as to dilute risk and enhance profitability.