In describing the free market, Adam Smith defined it as controlled by the so-called “invisible hand of the market”. And true to that definition, we’ve all seen markets move in ways that beggar belief. For folks watching from the sidelines, it can be quite intriguing, but active traders don’t have that luxury. If you have $5,000 invested in an ongoing trade, there’s only one possible emotion that you can feel if the market suddenly moves in an unfavorable direction.
To help traders, trading platforms like mt4 forex come equipped with multiple indicators that they can analyze to feel the pulse of the market and make informed decisions to support their bets on the future of the market. There are countless indicators out there, but in this article, we lost the top 10 that are absolutely important for every trader to know.
1. Moving average (MA)
The market is always moving in varying directions all the time. The moving average is one of the most vital indicators, as it helps traders to see whether they are in a bull market or a bear market, and it allows them to better predict the direction that the market is headed.
It works by indicating the price averages over the chosen period. For example, configuring the indicator on mt4 forex to show the moving averages for the past 50 days would show the average prices of the asset as a single line graph. So, by checking whether or not the current price is above or below the moving average, one can tell whether it would go up or otherwise.
2. Relative strength index (RSI)
The relative strength index is another commonly used indicator, used by traders to estimate market conditions and to decide when price movements get too extreme.
It is measured on a scale of 0 to 100. When an asset is valued at greater than 70, it is said to be overbought and ripe for a price correction; so at this point, traders take profits on any short-term plays. And when an asset is valued at less than 30, it is said to be oversold and might be a prime investment opportunity, ahead of a potential price rally.
3. Moving average convergence/divergence (MACD)
The MACD is an indicator that tracks momentum in the markets by showing the relationship between two exponential moving averages (EMA) in a histogram. It is usually calculated by subtracting the EMA of the longer term from the EMA of the shorter term period under review. When there appears to be a convergence, it is taken as proof of cooling momentum in the markets. While an increasing divergence proves renewed momentum and activity.
4. Bollinger bands
Created by John Bollinger in the 1980s, the Bollinger Bands are one of the several indicators used on MT4 forex, to track and measure price volatility. The indicator calculates the standard deviation at the top and bottom of the selected asset’s moving average. This way, it depicts the range at which the asset is currently trading, and its level of volatility.
The smaller the width of the Bollinger bands, the lower volatility is in the market; and the wider the width, the higher the volatility of the market. But that’s not all. When the simple moving average of the asset is closer to or above the upper hand, that signifies that the asset is overbought; and when it’s the other way around, it means that the asset is oversold.
5. Stochastic oscillator
The stochastic oscillator is another indicator on MT4 Forex that helps traders to identify entry and exit points by showing the trend in the price movement of the selected asset. By drawing comparisons between the closing price of the asset and a given set of its past prices, the indicator displays the trend that the asset is likely to move in.
It is usually measured on a scale of 0 – 100. When higher than 80, it indicates that the asset has been overbought and is likely to enter a period of correction. And when it’s less than 20, the asset may be ripe for a price rally.
6. Fibonacci retracement
Ever so often, the forex market experiences temporary pullbacks and full-on price reversals. Ideally, nobody wants to be exposed to these events and would prefer to immediately cut losses. But, because these events are unavoidable and can be quite frequent, forex traders have to expertly maneuver them if they are to make any profit. Cutting one’s losses might be the best thing to do when the drop-off is steep and enduring; but when it’s just a temporary pullback, the trader may have just unnecessarily incurred a loss. The Fibonacci indicator helps to guide traders in this aspect, by providing benchmarks to indicate where support or resistance may occur
7. Donchian channels
Donchian channels are another kind of indicator usually available on trading platforms like MT4 forex, to enable traders to monitor market volatility. Developed by Richard Donchian, the indicator works by creating a shaded area between the highest and lowest prices points across the selected time period.
8. Standard deviation
As its name implies, this indicator measures the deviation of asset prices from the moving average. It measures market volatility by determining exactly by how much the asset price has deviated from the average. Basically, it tells traders whether price changes are “big” or “small”. Using this information, they can then predict how volatile the market would be in the future.
It’s like going to the Gan Hong Hoe market in Malacca and finding a graph depicting how much the price of chicken or rice has changed in relation to their average prices.
9. Average directional index (ADX)
Nothing hurts more than jumping on what you thought was a price rally only to find that it was only a momentary jump and that the asset is still in a bear market. To prevent this, the ADX indicator enables traders to gauge the strength of a trend and to determine whether or not the trend will continue.
Also, it works using a scale of 0-100. A value greater than 25 is interpreted to be a strong trend. And one less than 25 is interpreted as just a weak, passing fluctuation.
10. Ichimoku cloud
Translating to mean “one-look equilibrium chart”, this indicator provides traders with a lot of information in one look. It’s vital for traders trying to track the market on the go, and traders who simply don’t have the luxury of examining the market indicator by indicator. It provides information on support and resistance, price momentum, and the price trend in one look. Instead of moving averages, Ichimoku Cloud uses Tenkan Sen and Kijun Sen. And traders can make decisions based on whether a selected asset is above or below the Kumamoto cloud. When it’s above, the market is bullish; and when it’s below, the market is bearish.
Final words
Although traders need to monitor the market using technical indicators, one most important rule of thumb is to never use too many indicators at once. In order words, always keep it simple. Create and stick to a trading plan, pick a few indicators that you are most adept at and let them guide you.
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