Discover the most common technical indicators in MT4 and learn how they can help you identify market trends and patterns. Below, we describe the most commonly used ones.
Index
Technical Indicators and Uses to Improve Decision-Making
A technical indicator in trading is a tool used to analyze the price behaviour of a financial asset in the past and, through that, try to predict its possible future behaviour. Technical indicators are based on the idea that patterns in an asset's price and volume behaviour can reveal trends, changes in direction, and signals to buy or sell the financial asset.
Technical indicators in trading are helpful because they provide objective and quantifiable information about market behaviour. Additionally, they can help traders identify market entry and exit opportunities, define support and resistance levels, establish profit targets, and limit possible losses.
Traders can make informed decisions about when and how to trade in the market using technical indicators. This is because technical indicators can provide a clearer and more objective view of market behaviour, which can help traders make more informed decisions and reduce their risk of loss.
Trend Indicators
The trend in trading refers to the general direction of an asset's price movement. Trend indicators are used to identify and follow the prevailing direction of prices over a certain period. The most common trend indicators are:
Average Directional Movement Index (ADX)
ADX is used to help traders identify whether there is a strong or weak trend in the market and determine if a trend could continue or reverse.
Mathematical formula: ADX is calculated by taking the difference between two values, the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI), divided by their sum. An exponential moving average (EMA) is applied to this value to produce the final ADX.
Interpretation: ADX oscillates between 0 and 100, and a value above 25 indicates a strong trend, while a value below 20 indicates a weak trend. A value above 50 indicates a strong trend.
Parameters: Typical values for ADX are a 14-period exponential moving average.
Advantages and disadvantages: An advantage of ADX is that it can provide information on the strength of a trend, which can help traders make informed investment decisions. However, a disadvantage is that it can falsely signal a trend reversal.
Example with the EURUSD pair: Let's say the ADX for EURUSD is 35. This indicates a strong trend in the market, and it is more likely that the trend will continue rather than reverse.
Bollinger Bands
Bollinger Bands identify potential trend changes and determine support and resistance levels.
Mathematical formula: Bollinger Bands consist of three lines: a simple moving average (SMA) and two standard deviations (SD) above and below the SMA. The upper band is calculated by adding two times the SD to the SMA, while the lower band is calculated by subtracting two times the SD from the SMA.
Interpretation: The upper and lower bands determine possible resistance and support levels. When the price reaches the upper band, it may indicate that the market is overbought, suggesting a possible reversal to the downside. Similarly, when the price reaches the lower band, it may indicate that the market is oversold, suggesting a possible reversal to the upside.
Parameters: The period and standard deviation for calculating Bollinger Bands can vary, but typical values are a 20-period SMA and a 2-standard deviation.
Advantages and disadvantages: Bollinger Bands are useful for identifying support and resistance levels and help traders determine potential entry and exit points. However, they may give false signals of a trend reversal in highly volatile markets or during consolidation periods.
Example with the EUR/USD pair: Suppose that the upper Bollinger band for EUR/USD is 1.2345 and the lower band is 1.2100.
If the EUR/USD price approaches the lower band, it could suggest that the market is oversold, and a possible buying opportunity may exist.
If the EUR/USD price approaches the upper band, it could suggest that the market is overbought, and a possible selling opportunity may exist.
Envelopes
Envelopes identify potential trend changes and determine support and resistance levels.
Mathematical formula: Envelopes consist of two lines, an upper line and a lower line. The upper line is calculated by adding a certain percentage to the average price, while the lower line is calculated by subtracting the same percentage from the average price.
Interpretation: The upper and lower lines determine potential support and resistance levels. When the price reaches the upper line, it may indicate that the market is overbought, suggesting a possible reversal to the downside. Similarly, when the price reaches the lower line, it may indicate that the market is oversold, suggesting a possible reversal to the upside.
Parameters: The percentage used to calculate Envelopes may vary, but typical values are 5% or 10%.
Advantages and disadvantages: Envelopes help identify support and resistance levels and help traders determine possible entry and exit points. However, they can give false signals of a trend reversal in highly volatile markets or during consolidation periods.
Example with the EURUSD pair: Suppose the upper line of the Envelope for EURUSD is at 1.2345 and the lower line is at 1.2100.
If the EURUSD price approaches the lower line, it may suggest that the market is oversold, and a potential buying opportunity may exist.
If the EURUSD price approaches the upper line, it may suggest that the market is overbought, and a potential selling opportunity may exist.
Ichimoku Kinko Hyo
Ichimoku Kinko Hyo (or Ichimoku Cloud) is an indicator used to analyze market trends and identify potential support and resistance levels.
Mathematical formula: The Ichimoku Kinko Hyo indicator consists of several lines, including the conversion line (Tenkan Sen), the baseline (Kijun Sen), the cloud (Kumo), the lagging line (Chikou Span), and the extension line (Senkou Span A and Senkou Span B). The formula for each line is as follows:
Tenkan Sen = (highest high of last 9 periods + lowest low of last 9 periods) / 2
Kijun Sen = (highest high of last 26 periods + lowest low of last 26 periods) / 2
Senkou Span A = (Tenkan Sen + Kijun Sen) / 2, plotted 26 periods ahead
Senkou Span B = (highest high of last 52 periods + lowest low of last 52 periods) / 2, plotted 26 periods ahead
Chikou Span = current closing price plotted 26 periods behind
Kumo = cloud formed by Senkou Span A and Senkou Span B
Interpretation: The conversion line and baseline are used to determine the direction of the trend, while the cloud is used to identify potential levels of support and resistance. The lagging line is used to confirm the direction of the trend. When the price is above the cloud, the market is considered to be in an uptrend, while when the price is below the cloud, the market is considered to be in a downtrend. The lagging line must be above or below the prices to confirm the trend.
Parameters: The default parameters for the Ichimoku Kinko Hyo indicator are 9, 26, and 52, but these values can be adjusted according to the trader's preferences or market conditions.
Advantages and disadvantages: The Ichimoku Kinko Hyo indicator helps identify the direction of the trend and potential levels of support and resistance. However, due to the complexity of the indicator, it can be challenging to understand for some traders and can give false signals in highly volatile markets or during consolidation periods.
Example with the EURUSD pair: Suppose the price of EURUSD is above the cloud, and the lagging line is above the prices. This indicates that the market is in an uptrend. The conversion line and baseline can be used to identify potential support and resistance levels. In contrast, the cloud can determine the trend's strength and identify potential entry and exit points.
Moving Average (MA)
The moving Average is an indicator used to identify market trends and to generate buy or sell signals based on price crossovers with the moving average.
Mathematical formula: The MA indicator is calculated by taking the average of the closing prices over a certain period. The formula for the MA is as follows: MA = Sum of the closing prices of the last n periods / n, where "n" is the number of periods used for the calculation.
Interpretation: The MA indicator is used to determine the direction of the market trend. When the price is above the MA, the market is considered to be in an uptrend, while when the price is below the MA, the market is considered to be in a downtrend. Price crossovers with the MA can be used to generate buy or sell signals.
Parameters: The parameters of the MA indicator include the number of periods used for the calculation (known as the period of the moving average) and the moving average used (e.g., simple moving average, exponential moving average, weighted moving average, etc.).
Advantages and disadvantages: The MA indicator is easy to use and one of the traders' most popular indicators. It can help identify the direction of the trend and can generate buy or sell signals based on price crossovers with the MA. However, the indicator also has some disadvantages, such as the fact that it is a lagging indicator and can generate late signals, resulting in losses if used in isolation without other complementary indicators. Additionally, using a single moving average period may not be sufficient to capture the complexity of market trends.
Example with EUR/USD: Suppose the EUR/USD pair is evaluated with a 50-day moving average period. If the pair's price is above the MA, the market is in an uptrend, and traders may look for opportunities to buy the pair. If the pair's price falls below the MA, the market is trending lower, and traders may look for opportunities to sell the pair. If the price of the pair crosses the MA from below to above, it is considered a buy signal, while if the price of the pair crosses the MA from above to below, it is considered a sell signal.
Parabolic SAR
The Parabolic SAR (Stop and Reverse) indicator identifies market trends and generates buy or sell signals.
Mathematical formula: The Parabolic SAR uses a complex mathematical formula involving acceleration factors and closing prices. The formula is used to calculate the SAR point for each period. The SAR is calculated as follows: If we are in an uptrend, the SAR is calculated by adding the previous SAR and the acceleration factor multiplied by the difference between the previous session's high and the previous SAR. If we are in a downtrend, the SAR is calculated by adding the previous SAR and the acceleration factor multiplied by the difference between the previous session's low and the previous SAR.
Interpretation: The Parabolic SAR is used to determine the direction of the market trend. SAR points appear below the price in an uptrend, while in a downtrend, SAR points appear above the price. The SAR points move related to the price, meaning that the SAR adjusts as the trend continues. The indicator generates buy or sell signals when the SAR points cross the price.
Parameters: The parameters of the Parabolic SAR indicator include the acceleration factor and the maximum factor. The acceleration factor determines how the SAR adjusts to the trend. In contrast, the maximum factor is used to limit the maximum value of the acceleration factor.
Advantages and disadvantages: The Parabolic SAR is easy to use and can help traders identify the direction of the market trend. It can also generate buy or sell signals when the price crosses with the SAR. However, the indicator can generate false signals in sideways or volatile markets. Additionally, using a single indicator may not be sufficient to make informed trading decisions.
Example with the EUR/USD pair: Let's suppose we are using the Parabolic SAR indicator with an initial acceleration factor of 0.02 and a maximum factor of 0.2 on a daily chart of the EUR/USD pair.
The first SAR will be calculated using the closing price of the first trading day. If the price moves in a direction that confirms the trend, the acceleration factor will be increased by 0.02 each day until it reaches the maximum factor of 0.2. If the price moves in the opposite direction, the SAR will change direction and be placed at the highest or lowest point reached up to that point in the trend.
Suppose the EUR/USD is in an uptrend, and the first SAR is calculated at 1.1500. If the price continues to move in the same direction and reaches 1.1550 the next day, the next SAR will be calculated as 1.1520, using the acceleration factor of 0.02.
If the price continues to rise, the acceleration factor will increase by 0.02 each day until it reaches the maximum factor of 0.2. If the price starts to move in the opposite direction and falls below 1.1520, the SAR will change direction and be placed at the highest point reached in the uptrend up to that point.
Standard Deviation
The Standard Deviation indicator is used to measure market volatility and to help traders identify price deviations from its moving average.
Mathematical formula: Standard Deviation is calculated using the standard deviation of closing prices of an asset over a specific period. The formula to calculate standard deviation is quite complex. Still, it involves adding the difference between each closing price and the moving average during a specific period, squaring each difference, summing all the squared differences, and then dividing the result by the number of periods.
Interpretation: Standard Deviation is used to measure market volatility. If the Standard Deviation is high, prices fluctuate greatly, and the market becomes more volatile. If the Standard Deviation is low, prices fluctuate less, and the market is less volatile.
Parameters: Standard Deviation can be adjusted to calculate the standard price during different periods. For example, the standard closing price can be calculated for 10 days, 20 days, or 50 days. Traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of Standard price is that it helps traders measure market volatility and identify price deviations from its moving average. This can be useful for making trading decisions and setting stop loss and take profit levels. A disadvantage of Standard price is that it can give false signals during high volatility, especially if used as an overbought or oversold indicator. In these cases, sudden price fluctuations unrelated to a trend reversal may occur.
Example with the EUR/USD pair: Let's say we are using the Standard Deviation indicator to calculate the volatility of the EUR/USD pair over the past 20 days.
If the standard price is high, we can infer that the market has been more volatile during that period. If the standard price is low, we can infer that the market has been less volatile.
For example, if the standard price has been 0.005 over the past 20 days, we can infer that the market has been relatively stable. If the standard price has been 0.02 over the past 20 days, we can infer that the market has been more volatile. Traders can use this information to adjust their trading strategy accordingly, for example, by increasing or decreasing the size of their positions or adjusting their stop loss and taking profit levels based on the market's volatility.
Oscillators
An oscillator or technical momentum indicators measure the speed and change of price movements in a financial asset. These indicators are based on the premise that prices tend to oscillate within defined ranges and that changes in the momentum or strength of an asset can indicate a change in price direction.
Oscillator indicators are typically displayed as a line chart that oscillates above and below a centerline, with overbought and oversold levels marked on either side. When the indicator line moves above the centerline, it is considered bullish, indicating an uptrend in the asset's price. Conversely, when the indicator line falls below the centerline, it is considered bearish, indicating a downtrend in the asset's price.
Average True Range
The Average True Range (ATR) indicator is used to measure market volatility and help traders establish stop loss and take profit levels.
Mathematical formula: The ATR is calculated using the True Range (TR), which measures the difference between the high and low of each day and the average price of TR over a specified period. The formula for calculating the ATR is quite complex. It involves adding up the TR over a specified period, dividing the result by the number of periods, and then smoothing it using an exponential moving average.
Interpretation: The ATR is used to measure market volatility. If the ATR is high, prices fluctuate greatly, making the market more volatile. If the ATR is low, prices fluctuate less, and the market is less volatile.
Parameters: The ATR can be adjusted to calculate the true average price over different periods. For example, the true average price of an asset's prices can be calculated over 10 days, 20 days, or 50 days. Traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of the ATR is that it helps traders measure market volatility and establish more precise stop loss and take profit levels. Additionally, since it uses the true average price, it considers price gaps between days, making it more accurate than other volatility indicators. A disadvantage of the ATR is that it can be susceptible to sudden price fluctuations during high volatility, leading to false signals. Additionally, since it uses an exponential moving average to smooth the data, there can be a delay in the signal when sudden changes in volatility occur.
Example with EURUSD pair: Let's say we are using the ATR indicator to calculate the volatility of the EUR/USD pair over the last 20 days.
If the ATR is high, we can infer that the market has been more volatile during that period. If the ATR is low, we can infer that the market has been less volatile. For example, if the ATR is 0.005 over the last 20 days, we can infer that the market has been relatively stable. If the ATR is 0.02 over the last 20 days, we can infer that the market has been more volatile.
To establish stop loss and take profit levels, traders can use the ATR to determine the size of typical market price movements. For example, if the ATR is 0.01, a trader could set a stop loss of 0.02 to cover twice the typical size of the price movement. Similarly, a trader could set a take profit of 0.03 to capture three times the typical size of the price movement.
Bears Power
Bears Power is an indicator used to measure the bearish strength of the market and help traders identify potential reversal points in a bearish trend.
Mathematical formula: Subtract the current period's closing price from the N-period exponential moving average. The formula for calculating the Bears Power is BP = SMA(N) - Close, where "SMA" stands for "Simple Moving Average," and "Close" is the current closing price.
Interpretation: The Bears Power is used to measure the bearish strength of the market. If the Bears Power value is negative, the market is in a bearish trend, and the bears (sellers) have control. If the Bears Power value is positive, buyers may be gaining strength, and the bearish trend may be about to reverse.
Parameters: According to traders' preferences and strategies, the Bears Power can be adjusted to calculate the exponential moving average during different periods, such as 10, 20, or 50 days.
Advantages and disadvantages: One of the main advantages of the Bears Power is that it helps traders identify potential reversal points in a bearish trend. It is also easy to understand and apply, making it popular among traders. However, a disadvantage is that it can generate false signals in highly volatile markets since the exponential moving average may take time to adjust to sudden price changes.
Example with EURUSD pair: Suppose we use the Bears Power with a 10-period exponential moving average on the EURUSD currency pair. If the Bears' Power is negative, such as -50, sellers have control, and the market is in a bearish trend. If the Bears' Power starts to decrease and approach zero, it could signal that buyers are gaining strength, and the bearish trend may be about to reverse.
Bulls Power
The Bulls Power indicator measures the bullish strength of the market and helps traders identify potential points of reversal in the uptrend.
Mathematical formula: The Bulls Power is calculated by subtracting the N-period exponential moving average from the current period's closing price. The formula to calculate the Bulls Power is BP = Close - SMA(N), where "SMA" stands for "Simple Moving Average" and "Close" is the current closing price.
Interpretation: Bulls Power is used to measure the bullish strength of the market. If the value of the Bulls Power is positive, it means that the market is in an uptrend and that the bulls (buyers) are in control. If the value of the Bulls Power is negative, sellers may be starting to gain strength, and the uptrend may be about to reverse.
Parameters: The Bulls Power can be adjusted to calculate the exponential moving average over different periods. For example, the exponential moving average of an asset's prices can be calculated over 10 days, 20 days, or 50 days. Traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of Bulls Power is that it helps traders measure the bullish strength of the market and identify potential points of reversal in the uptrend. Additionally, as it uses an exponential moving average, it considers recent price changes, making it more accurate than other market strength indicators. One disadvantage of Bulls Power is that it can be susceptible to sudden price fluctuations during high volatility, which can generate false signals.
Example with the EURUSD pair: Let's assume that the closing price of the EURUSD pair in a given period is 1.2000 and that the 10-period exponential moving average is 1.1980.
To calculate the value of Bulls Power, the exponential moving average is subtracted from the current closing price: BP = 1.2000 - 1.1980 = 20. This indicates that the bulls (buyers) control the market and that the uptrend may continue.
If the value of the Bulls Power were negative, for example, -20, this could indicate that sellers are gaining strength and that the uptrend may be about to reverse.
Commodity Channel Index (CCI)
The Commodity Channel Index is used to identify potential trend reversal points in the market. Traders use the CCI to determine if an asset is overbought or oversold and to identify divergences between price and the indicator, which may signal a change in the market trend.
Mathematical formula: Subtract the simple moving average of the typical prices of an asset over a certain period from the simple moving average of the typical prices of an asset over a shorter period. The CCI formula is CCI = (Typical Price - SMA(Typical Price, N)) / (0.015 * Mean Deviation), where "Typical Price" is the sum of the high, low, and close price divided by three, "SMA" means "Simple Moving Average," "N" is the shorter period, and "Mean Deviation" is the average of the absolute deviations of the typical prices of the last N periods from their simple moving average.
Interpretation: The CCI oscillates around zero, and traders use this indicator to identify overbought or oversold levels. If the CCI is positive, it means that the asset is in an uptrend and is overbought. If the CCI is negative, the asset is in a downtrend and is oversold. Traders can also use divergences between price and CCI to identify potential trend changes.
Parameters: The CCI can be adjusted to calculate simple moving averages over different periods, and traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of the CCI is that it helps traders identify potential trend reversal points and determine if an asset is overbought or oversold. Additionally, since it uses the simple moving average of typical prices, it considers high, low, and close prices, making it more accurate than other overbought/oversold indicators. A disadvantage of the CCI is that it can generate false signals in highly volatile markets.
Example with the EURUSD pair: Suppose a trader analyses the EURUSD currency pair and wants to use the CCI to identify potential trend reversal points. The trader decides to use a standard 20-period setting for the CCI.
After analyzing the chart, the trader sees that the CCI has been oscillating around zero for the past few days, indicating that the market is in a range. However, the trader notes that the price has been forming a series of lower highs and lows, indicating a potential downtrend in formation. The trader also notes that the CCI has been forming a bullish divergence on the price over the past few days. This divergence may signal that the current downtrend is ending and that the price may start to rise soon.
With this information, the trader stays alert for potential signals of an uptrend reversal in the EURUSD.
DeMarker
DeMarker is a technical indicator used to identify potential market trend reversal points and determine the strength of an existing trend. Traders use DeMarker to determine if an asset is overbought or oversold and to identify divergences between price and the indicator, which can signal a change in the market trend.
Mathematical formula: The DeMarker is calculated using an asset's highest and lowest prices during a specific period. The formula to calculate DeMarker is DeM = (High - High_prev) / ((High - High_prev) + (Low - Low_prev)), where "High" is the current period's highest price, "High_prev" is the previous period's highest price, "Low" is the current period's lowest price, and "Low_prev" is the previous period's lowest price.
Interpretation: The DeMarker oscillates between 0 and 1, and traders use this indicator to identify overbought or oversold levels. If the DeMarker is above 0.7, the asset is overbought, and there could be a downward price correction. If the DeMarker is below 0.3, the asset is oversold, and there could be an upward price correction. Traders can also use divergences between price and DeMarker to identify potential trend changes. DeMarker can be adjusted to calculate highs and lows during different periods. Traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One advantage of DeMarker is that it helps traders identify potential market trend reversal points and determine if an asset is overbought or oversold. It is also easy to understand and use because it is based on the highest and lowest prices. One disadvantage of DeMarker is that it can generate false signals in high-volatility markets.
Example with the EURUSD pair: A trader interested in using the DeMarker indicator to identify potential market trend reversal points in the EURUSD currency pair decides to use a 14-day period to calculate DeMarker.
After analyzing historical data, the trader notices that the DeMarker has been above 0.7 for several consecutive days. This indicates that the market is overbought, and a downward trend reversal may occur shortly. The trader waits for the DeMarker to fall below 0.7 before taking a short position in the EURUSD pair.
After a few days, the DeMarker finally falls below 0.7, indicating that the upward trend may end. The trader then takes a short position in the EURUSD pair, hoping the market will move downward. The trader also uses other technical indicators and tools to confirm the DeMarker signal and avoid hasty decisions.
In summary, the trader used the DeMarker indicator to identify a potential market reversal and took a short position in the EURUSD pair after the DeMarker fell below the overbought level.
Force Index
The Force Index measures the strength behind price movements and detects possible trend changes. The indicator comprises three main elements: the current, previous, and trading volume. The Force Index helps traders identify the strength behind price movements and confirm trends.
Mathematical Formula: The Force Index is calculated by subtracting the current closing price from the previous closing price and multiplying the result by the current volume. The result is then divided by the accumulated volume during the analysed period. The formula for calculating the Force Index is FI = (Close - Close n) x Volume, where "Close" is the current closing price, "Close n" is the previous closing price, and "Volume" is the current trading volume.
Interpretation: The Force Index is represented as a line oscillating around a central line at zero. If the Force Index is positive, it indicates that the strength behind the bullish movement is greater than that behind the bearish movement. At the same time, if it is negative, it indicates the opposite. Traders can use the Force Index to confirm bullish or bearish trends. If the Force Index is in a bullish trend and the price is also bullish, this may confirm the bullish trend. If the Force Index is in a bearish trend and the price is also in a bearish trend, this may confirm the bearish trend.
Parameters: The Force Index can be adjusted for different periods, depending on the trader's preferences and the financial instrument being analyzed. Typical values for the Force Index are 13 and 21 periods.
Advantages and disadvantages: One advantage of the Force Index is that it helps traders confirm trends and detect possible changes in price direction. Using trading volume in the calculation, the Force Index considers the strength behind price movements and can provide a more accurate indication of the trend. However, a disadvantage of the Force Index is that it can generate false signals in markets with high volatility.
Example with the EUR/USD pair: Suppose the 13-period Force Index of the EUR/USD pair has been in a bullish trend for the past three days. If the price has also been in a bullish trend during this period, this may indicate a confirmation of the bullish trend. If the Force Index starts to show signs of weakness and begins to decrease, this may be a signal that the bullish trend is losing strength.
Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence is a technical analysis tool used to identify trend changes in the market and confirm an existing trend's validity.
Traders use the MACD to determine whether a bullish or bearish trend is strong or weak and to generate buy or sell signals. It is also used to identify divergences between the price and the indicator, which can signal a change in the market trend.
Mathematical Formula: The MACD is calculated by subtracting the 26-period exponential moving average of the asset's closing price from the 12-period exponential moving average of the asset's closing price. A signal line is then plotted, a 9-period exponential moving average of the MACD. The formula for calculating the MACD is MACD = EMA(12) - EMA(26), and the formula for the signal line is Signal = EMA(9) of MACD.
Interpretation: The MACD oscillates around zero, and traders use this indicator to identify overbought or oversold levels. If the MACD is positive, the asset is in a bullish trend and overbought. If the MACD is negative, the asset is in a bearish trend and is oversold. Traders also use divergences between the price and the MACD to identify possible trend changes.
Parameters: The MACD can be adjusted to calculate exponential moving averages over different periods. Traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of the MACD is that it is easy to interpret and can be used in different time frames. Additionally, as it uses exponential moving averages, it adapts quickly to changes in the market. A disadvantage of the MACD is that it can generate false signals in highly volatile markets.
Example with the EUR/USD pair: If the price crosses above the MACD signal line and the MACD is positive, this could be a buy signal. On the other hand, if the EURUSD price crosses below the MACD signal line and the MACD is negative, this could be a sell signal. Traders can also use divergences between the price and the MACD to identify possible trend changes in the EURUSD.
Momentum
Momentum is an indicator used to determine the strength of the current market trend and detect possible direction changes. Traders use momentum to identify overbought or oversold levels. When the momentum is above zero, the price is in an uptrend, and the asset is overbought. On the other hand, when the momentum is below zero, it indicates that the price is in a downtrend and that the asset is oversold.
Mathematical Formula: Momentum = Current Price - Price n periods ago.
Interpretation: The momentum is an indicator that oscillates around a central line, which is zero. When the price is in an uptrend, the momentum will be above zero; when the price is in a downtrend, the momentum will be below zero. The momentum can identify divergences with the price, signalling a possible trend change early.
Parameters: The period used to calculate momentum can be adjusted according to the trader's preferences and strategies. The most common periods for momentum are 10 or 14 days.
Advantages and disadvantages: The momentum indicator is easy to understand and use and is a valuable tool for traders looking to identify the strength and direction of the market trend. However, a disadvantage of momentum is that it can be too sensitive to short-term price changes, which can generate false signals in volatile markets.
Example with the EUR/USD pair: Suppose the current price of EUR/USD is 1.2000, and the period for calculating momentum is 14 days.
During the last 14 days, the maximum price of EUR/USD was 1.2100, the minimum price was 1.1900, and the most recent closing price was 1.2000. To calculate the momentum value, subtract the current closing price of EUR/USD from the closing price 14 days ago. In this case, the momentum value would be Momentum = 1.2000 - 1.1860 = 0.0140. This positive value indicates that the price of EUR/USD has increased in the last 14 days.
Traders can use this indicator to identify market uptrends or downtrends and to confirm buy or sell signals generated by other indicators or trading strategies.
Moving Average of Oscillator (MAO)
The Moving Average of Oscillator (MAO) is a technical indicator used to determine the direction and strength of a market trend. It is used to identify possible trend reversal points and confirm the current trend's strength.
Mathematical formula: The MAO is calculated by subtracting the Exponential Moving Average (EMA) of the Oscillator (OSMA) from the EMA of the previous OSMA. The formula to calculate the MAO is MAO = EMA(OSMA, n) - EMA(EMA(OSMA, n), n), where "n" is the period used to calculate the EMAs.
Interpretation: The MAO is an indicator that oscillates around zero and is used to confirm the strength of a current trend. If the MAO is positive, the trend is bullish, while if it is negative, it means that the trend is bearish. Additionally, the crossover of the MAO above or below zero can indicate a possible trend reversal.
Parameters: The MAO can be adjusted to calculate EMAs during different periods. Traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of the MAO is that it helps traders confirm the current trend's strength and identify possible trend reversal points. Additionally, it uses EMAs and is more sensitive to recent price changes. A disadvantage of the MAO is that it can generate false signals in markets with high volatility.
Example with the EURUSD pair: Suppose a trader uses the MAO with a 14-day period to analyze the EURUSD pair on a daily chart.
If the MAO is positive and the EMA of the OSMA is above the EMA of the OSMA, this indicates a strong bullish trend and the trader could consider taking a long position on the pair.
On the other hand, if the MAO is negative and the EMA of the OSMA is below the EMA of the OSMA, this indicates a strong bearish trend and the trader could consider taking a short position on the pair.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator used to measure the strength of a trend and determine whether an asset is overbought or oversold. Traders use the RSI to identify potential trend reversal points and confirm the direction of the market trend.
Mathematical formula: The formula is RSI = 100 - 100 / (1 + RS), where RS is the ratio of the average gain to the average loss over a specific period. The most commonly used period is 14, but it can be adjusted based on a trader's preferences and trading strategies.
Interpretation: The RSI oscillates between 0 and 100, and traders use this indicator to identify overbought and oversold levels. If the RSI is above 70, it is considered that the asset is overbought, and the trend is likely to reverse downwards. If the RSI is below 30, the asset is considered oversold, and the trend will likely reverse upwards. Traders can also use divergences between price and RSI to identify potential trend changes.
Parameters: The RSI can be adjusted to calculate the average gain and loss over different periods. The most commonly used period is 14, but it can be adjusted based on a trader's preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of the RSI is that it is easy to interpret and use. It is also helpful in identifying overbought and oversold levels and confirming the direction of the market trend. A disadvantage of the RSI is that it can generate false signals in highly volatile markets.
Example with the EURUSD pair: If the EURUSD has an RSI of 80, indicating that the pair is overbought, a trader could interpret this as a signal that the price of the EURUSD may be about to drop and could consider selling the pair. On the other hand, if the EURUSD RSI is 20, indicating that the pair is oversold, a trader could interpret this as a signal that the price of the EURUSD may be about to rise and could consider buying the pair.
Relative Vigor Index (RVI)
The Relative Vigor Index (RVI) is a momentum indicator used to measure the strength of an asset's trend. Traders use the RVI to determine if an asset is in an uptrend or downtrend and to identify possible market trend reversal points.
Mathematical formula: The RVI is calculated by comparing the current closing and opening prices with the difference between the maximum and minimum prices over a specific period. The formula to calculate the RVI is RVI = (Closing Price - Opening Price) / (Maximum Price - Minimum Price), where "Closing Price" is the current closing price, "Opening Price" is the current opening price, "Maximum Price" is the maximum price of the specified period, and "Minimum Price" is the minimum price of the specified period.
Interpretation: The RVI moves around a central line typically set at 0. If the RVI is above the central line, the market trend is bullish, and buyers are in control. If the RVI is below the central line, the market trend is bearish, and sellers are in control. Traders can also use divergences between the price and the RVI to identify potential trend changes.
Parameters: The RVI can be adjusted to use different periods according to a trader's preferences and trading strategies.
Advantages and disadvantages: One advantage of the RVI is that it is easy to interpret and can help traders identify potential market trend reversal points. Additionally, since it considers both the closing and opening prices, it considers price movements throughout the specified period. One disadvantage of the RVI is that it can generate false signals in highly volatile markets.
Example with the EURUSD pair: If a trader is using the RVI to analyze the EURUSD currency pair on a daily timeframe, they could set the central line at 0 and adjust the period to 14 days.
If the RVI is above 0, the market trend is bullish, and buyers are in control. If the RVI is below 0, the market trend is bearish, and sellers are in control. The trader can also use divergences between the price and the RVI to identify possible trend changes. If the price of the EURUSD is rising, but the RVI is falling, it could be a sign that the bullish trend is losing momentum, and a trend change may be coming soon.
Stochastic Oscillator
The Stochastic Oscillator is a momentum indicator used to measure the strength and speed of price movements. Traders use it to identify potential market trend reversal points and overbought and oversold levels.
Mathematical Formula: The Stochastic Oscillator compares the current closing price of an asset with its price range over a specified period. The formula to calculate the Stochastic Oscillator is %K = (Current Close - Period Low) / (Period High - Period Low) * 100, where "%K" is the fast oscillation line and the period is usually set at 14. The slow oscillation line, "%D", is calculated using a 3-period simple moving average of the %K line.
Interpretation: The Stochastic Oscillator oscillates between 0 and 100, and traders use levels 20 and 80 as overbought and oversold signals, respectively. If the Stochastic Oscillator is above 80, the asset is considered overbought, and a downward reversal is expected. If the Stochastic Oscillator is below 20, the asset is considered oversold, and an upward reversal is expected. Traders can also use divergences between the price and the Stochastic Oscillator to identify potential trend changes.
Parameters: The period can be adjusted to calculate Stochastic Oscillator values over different periods. The default period is 14, but some traders prefer to adjust this value to 10 or 20 to adapt it to their trading strategies.
Advantages and disadvantages: The Stochastic Oscillator is a popular tool for traders because it can identify overbought and oversold levels. Also, because it is based on price range rather than absolute price, it is useful for smoothing price fluctuations and providing more precise signals. However, it can also generate false signals in markets with high volatility, so it is important to use it with other indicators and technical analysis tools to confirm signals and avoid hasty decisions.
Example with the EURUSD pair: Suppose the Stochastic Oscillator shows that the EURUSD is overbought at 87. The trader could interpret this as a signal that the asset has moved too far in a bullish direction and that the trend is likely to change downward shortly. The trader could consider taking a short position on the EURUSD to take advantage of this potential downward reversal.
Williams' Percent Range (WPR)
Williams' Percent Range (WPR) is a technical analysis indicator that identifies overbought and oversold levels in the market. It is an oscillator that measures the current price of an asset relative to its maximum and minimum price range over a specified period. Traders use the WPR to determine whether an asset is overbought or oversold and to identify possible trend reversal points.
Mathematical Formula: The mathematical formula for calculating the WPR is WPR = (Highest High - Close) / (Highest High - Lowest Low) * -100, where "Highest High" is the highest price over the specified period, "Lowest Low" is the lowest price over the specified period, and "Close" is the current closing price.
Interpretation: The WPR oscillates between -100 and 0, and traders use this indicator to identify overbought or oversold levels. If the WPR is above -20, the asset is overbought, indicating that the price will likely fall in the short term. If the WPR is below -80, the asset is oversold, indicating that the price will likely rise in the short term. Traders can also use divergences between the price and the WPR to identify possible trend changes.
Parameters: The WPR can be adjusted to calculate the highest and lowest prices over different periods. Traders can adjust the period according to their preferences and trading strategies.
Advantages and disadvantages: One of the main advantages of the WPR is that it helps traders identify possible trend reversal points and determine whether an asset is overbought or oversold. Additionally, it is easy to understand and use. One disadvantage of the WPR is that it can generate false signals in highly volatile markets.
Example with the EURUSD pair: If a trader uses the WPR to trade the EUR/USD pair on a daily time frame, sets the WPR to use the highest and lowest prices of the last 14 days, and observes that the current WPR is -85, this indicates that the EUR/USD is oversold and that the price is likely to rise in the short term.
The trader can use this information to open a long position in the EUR/USD but also observes that the MACD and RSI indicate that the EUR/USD is in a long-term downtrend, so they decide to wait for the WPR signal to be confirmed before making a trading decision.
Volume Indicators
Volume indicators are tools used in technical analysis to measure trading activity in a financial market. These indicators can provide valuable information about the strength or weakness of a trend, confirm the validity of a price movement, and detect possible changes in the market's direction.
When analyzing market trends, volume indicators can help traders determine whether the trend is gaining or losing momentum. If the volume increases along with the price trend, the trend gains strength. Conversely, if the volume decreases while the price trend continues, it may indicate that the trend is losing momentum and could reverse.
Volume indicators can also help traders identify potential price reversal points. For example, if the price of an asset is increasing while the volume is decreasing, it may indicate that the trend is about to reverse. Additionally, volume indicators can be used to confirm the validity of a price breakout or breakdown, which occurs when an asset's price moves outside of a defined trading range.
Accumulation/Distribution
The Accumulation/Distribution indicator measures an asset's buying and selling pressure, considering price and transaction volume. This indicator can help traders confirm a trend and identify possible reversal points.
Mathematical formula: The formula for calculating the Accumulation/Distribution indicator is AD = [(Close - Low) - (High - Close)] / (High - Low) * Volume, where "Close" is the closing price, "Low" is the lowest price of the period, "High" is the highest price of the period, and "Volume" is the transaction volume of the period.
Interpretation: The Accumulation/Distribution indicator is based on the premise that volume should confirm the trend. If the price rises and volume increases, this indicates intense buying pressure and the uptrend is expected to continue. On the other hand, if the price rises but the volume decreases, this indicates weak buying pressure and may signal a possible trend reversal.
Parameters: The Accumulation/Distribution indicator can be adjusted for different periods according to the trader's preferences and trading strategies.
Advantages and disadvantages: An advantage of the Accumulation/Distribution indicator is that it considers both price and volume, which can provide a more accurate indication of an asset's buying and selling pressure. Additionally, the Accumulation/Distribution indicator can be used with other technical analysis indicators to confirm signals and make more informed trading decisions. A disadvantage is that the indicator can be misleading in low-liquidity markets or when the price fluctuates in a narrow range.
Example with the EURUSD pair: Let's assume that the EURUSD has a closing price of 1.1800, a maximum price of 1.1820, a minimum price of 1.1780, and a volume of 10,000.
Using the formula:
AD = [(Close - Low) - (High - Close)] / (High - Low) * Volume
The value of the Accumulation/Distribution indicator would be:
AD = [(1.1800 - 1.1780) - (1.1820 - 1.1800)] / (1.1820 - 1.1780) * 10,000 = 2,500
If the indicator's value increases along with the price, this may indicate intense buying pressure and the uptrend is expected to continue.
Money Flow Index (MFI)
The Money Flow Index (MFI) is a technical indicator that uses both price and volume to measure buying and selling pressure in a financial asset. It is used to identify potential changes in trends and confirm a trend's strength.
Mathematical formula: The MFI is calculated using the following steps:
Calculate each period's typical price (TP): TP = (high + low + close) / 3.
Calculate each period's money flow (MF): MF = TP x volume.
Calculate the positive money flow (PMF) and negative money flow (NMF) by summing the money flows for periods where the TP is higher than the previous TP and for periods where the TP is lower than the previous TP, respectively.
Calculate the money flow index (MFI) using the following formula: MFI = 100 - [100 / (1 + PMF / NMF)]
Interpretation: The MFI uses volume and price to provide information on buying and selling pressure in a financial asset. It is used to identify potential changes in trends and confirm an existing trend's strength. MFI values above 80 are considered overbought, and values below 20 are considered oversold. When the MFI moves in the opposite direction of the price trend, it may indicate a potential trend reversal.
Parameters: The MFI is typically calculated using a 14-day period, but the periods can be adjusted to fit different trading styles and investment horizons. One advantage of the MFI is that it uses both price and volume, which can provide a better understanding of buying and selling pressure in a financial asset. However, like other technical indicators, the MFI is not infallible and should be combined with other indicators and analyses to make informed trading decisions.
Example with the EUR/USD pair: Suppose a trader is using the MFI to analyze the EUR/USD pair on a daily chart. After calculating the MFI using a 14-day period, the trader notes that the MFI has fallen below 20, indicating that the EUR/USD pair is oversold. The trader also observes that the price of the EUR/USD pair has been decreasing for several days. Based on this information, the trader could decide to open a long position on the EUR/USD pair, as the MFI suggests that the pair is oversold and may be ready for an upward reversal.
On Balance Volumes (OBV)
The On Balance Volume is a technical analysis indicator used to measure an asset's positive and negative volume flow. The indicator is based on the idea that trading volume can be used to confirm price action. If the price moves in line with volume, the trend is considered strong, while if the price moves against volume, the trend is weak.
The OBV is used to identify long-term trends as well as to confirm the strength of short-term trends. The indicator is handy in markets where trading volume, such as the stock market, is an essential factor in price action.
Mathematical Formula: The On Balance Volume is calculated by adding the trading volume on days when the price went up and subtracting the trading volume on days when the price went down. The result is added to a previous OBV value to obtain the current OBV value. The calculation can be summarized in the following formula:
OBV = Previous OBV + Current Volume if Current Price > Previous Price
OBV = Previous OBV - Current Volume if Current Price < Previous Price
OBV = Previous OBV if Current Price = Previous Price
Interpretation: If the OBV is increasing, the trend is considered bullish, while if the OBV is decreasing, the trend is considered bearish. If the OBV is stagnant, the trend is considered to be neutral. In addition to identifying trends, the OBV confirms the trend's strength. The trend is considered strong if the price rises and the OBV increases. If the price rises and the OBV does notDeviationease, the trend is considered weak. The OBV is also used to identify possible trend changes. If the price rises and the OBV decreases, the bullish trend is considered losing strength, and a trend change may occur.
Parameters: The On Balance Volume does not have adjustable parameters.
Advantages and Disadvantages: The On Balance Volume is easy to understand and use. The indicator helps identify long-term trends and confirm the strength of short-term trends. However, it is not suitable for all markets and assets. It is more suitable for markets where trading volume is an essential factor in price action. The indicator does not provide precise entry and exit signals but is used to confirm signals other indicators provide.
Example with the EUR/USD pair: Let's assume that the EUR/USD is trading at 1.2000, and the OBV shows a bullish trend. This means that buying volume is greater than selling volume, indicating bullish pressure in the market.
If the price rises to 1.2025, but the OBV does not follow the bullish trend, it is a divergence signal. This divergence indicates that volume action does not confirm the bullish price trend.
If the price starts to fall after the divergence, it may signal a bearish reversal in the market. On the other hand, if the price rises to 1.2025 and the OBV also shows a bullish trend, this indicates that the bullish price trend is being confirmed by volume action. If the price continues to rise and the OBV remains bullish, it signals that the bullish trend is strong and may continue.
Volumes
The Volumes indicator measures the volume of transactions in the foreign exchange market. It is used to gauge a trend's strength and confirm buy and sell signals.
Mathematical formula: The Volumes indicator is calculated by adding up the volume of all transactions that have taken place over a given period. A volume moving average is typically used to smooth the indicator line.
Interpretation: The Volumes indicator is used to measure the strength of a trend. When volume increases, the trend is considered strong. Conversely, when volume decreases, the trend is considered weak. The Volumes indicator is also used to confirm buy and sell signals. If the indicator line rises and prices rise, it is considered a buy signal. If the indicator line and prices are falling, it is considered a sell signal.
Parameters: The parameters of the Volumes indicator include the period over which the calculation is performed and the moving average used to smooth the indicator line.
Advantages and disadvantages: An advantage of the Volumes indicator is that it can help confirm buy and sell signals generated by other technical indicators. It can also help identify the strength of a trend and detect possible changes in market direction. A disadvantage of the Volumes indicator is that it can be affected by events that are not directly related to the forex market, such as holidays or crucial economic news.
Example with EURUSD pair: Suppose the EURUSD pair is experiencing an uptrend, and the volume of transactions is increasing. The Volumes indicator line is also rising, indicating that the uptrend is strong and a good opportunity to buy the EURUSD pair.
On the other hand, if the volume of transactions is decreasing and the Volumes indicator line is falling, it may signal that the uptrend is losing strength, and a trend reversal may occur. In this case, it may be a signal to sell the EURUSD pair.
Bill Williams Indicators
Bill Williams indicators are technical analysis tools the trader and technical analyst Bill Williams developed. These indicators help traders identify and confirm trends in financial markets and make trading decisions accordingly.
Bill M. Williams, Ph.D. (1932-2019) was considered the forefather of modern trading psychology combined with applied technical analysis and chaos theory in trading the stock and commodity markets. Bill had over 60 years of experience as a stock and commodities trader and over 30 years of teaching experience as a trading educator. |
Accelerator Oscillator
Accelerator Oscillator is a technical indicator created by Bill Williams to measure the acceleration or deceleration of market momentum. It is considered a complement to the Alligator indicator and is used to confirm entry and exit signals in the market.
Mathematical formula: The Accelerator Oscillator is calculated by subtracting the signal line (5-period SMA of AO) from the balance line (34-period SMA of the median price) of the Alligator indicator. The formula follows AO = SMA (median price, 5) - SMA (median price, 34).
Interpretation: The Accelerator Oscillator uses green and red bars to indicate the acceleration or deceleration of market momentum. Green bars indicate that acceleration is increasing, while red bars indicate that deceleration is increasing. When bars change colour, this may signal a change in the market direction.
Parameters: The Accelerator Oscillator can be adjusted by changing the periods of the 5 and 34-period SMAs.
Advantages and disadvantages: The advantage of the Accelerator Oscillator is that it can help traders confirm entry and exit signals in the market.
Example with EURUSD pair: In the 1-hour chart of the EURUSD pair, it can be seen that the Accelerator Oscillator has been showing green bars, indicating that acceleration is increasing. This could indicate that the current bullish trend has strength and could continue in the short term. However, traders should also consider other factors, such as support and resistance levels, to confirm their trading decisions.
Aligator
The Alligator indicator is a technical tool traders use to predict the direction of a trend and signal entry points in the market. The indicator consists of three lines: the jaw line (blue), the teeth line (red), and the lips line (green). These lines identify the trend's direction and momentum based on the idea that the market moves in three phases: sleeping, waking up, and eating.
Mathematical formula: The mathematical formula for the Alligator indicator is calculated as follows:
Jaw line: This line is calculated as the 13-period Simple Moving Average (SMA), shifted forward 8 bars.
Teeth line: This line is calculated as the 8-period SMA, shifted forward 5 bars.
Lips line: This line is calculated as the 5-period SMA, shifted forward 3 bars.
Interpretation: When the three lines are close together, the Alligator is sleeping. The longer the Alligator sleeps, the hungrier it will be when it wakes up. The green line represents the Alligator's lips, the red line represents its teeth, and the blue line represents its jaw. When the Alligator wakes up, the green line will move first, followed by the red line, and finally, the blue line. This pattern indicates an uptrend. When the Alligator is sleeping, the three lines are close together and move in a flat direction. When the Alligator wakes up, the three lines separate and move in different directions. If the green line crosses above the other two lines, this indicates an uptrend. If the green line crosses below the other two lines, this indicates a downtrend.
Parameters: The Alligator indicator can be customized by adjusting the periods of the three moving averages that make up the indicator. The default values are 13, 8, and 5 for the jaw, teeth, and lips moving averages, respectively.
Advantages and disadvantages: The advantage of the Alligator indicator is that it can provide clear signals for entry and exit points in the market. It is easy to use and can be customized to fit different trading styles.
Example with the EUR/USD pair: Suppose we have applied the Alligator on a daily chart of the EUR/USD pair. We observe that the lines of the Alligator are close together and oriented upwards, indicating a stable uptrend. Furthermore, the price of the EUR/USD pair has been trading above the lines of the Alligator for the past few weeks. In this case, a possible approach would be to look for buying opportunities on price pullbacks towards the lines of the Alligator in the context of the identified stable uptrend. We could use other indicators, candlestick pattern analysis, or risk management strategies to fine-tune our entry and exit points in the market.
Awesome Oscillator
The Awesome Oscillator (AO) is a momentum indicator that measures the difference between two simple moving averages (SMAs) of 34 and 5 periods applied to the average price (H + L) / 2. The indicator is used to identify the strength of a trend and possible changes in direction.
Mathematical formula: AO = SMA (5) (H + L) / 2 - SMA (34) (H + L) / 2
Interpretation: The Awesome Oscillator comprises green and red bars displayed in a separate window below the price chart. Green bars indicate that the 5-period SMA is greater than the 34-period SMA, suggesting an uptrend. Conversely, red bars indicate that the 5-period SMA is less than the 34-period SMA, suggesting a downtrend.
Parameters: The Awesome Oscillator has two simple moving averages (SMA) of 5 and 34 periods. There are no additional parameters to be configured.
Advantages and disadvantages: One of the main advantages of the Awesome Oscillator is its simplicity and ease of use. The green and red bars are easy to interpret, making them valuable tools for traders to identify the trend direction. However, since the indicator is based solely on simple moving averages, it can give false signals in markets with strong price fluctuations.
Example with the EURUSD pair: On the daily chart of the EUR/USD pair, the Awesome Oscillator shows a clear uptrend over several months, with green bars in the indicator window.
As the price rises, the indicator remains above zero, indicating that the uptrend remains strong. However, the indicator shows red bars at a specific point, suggesting a possible trend reversal. The trader could take this as a signal to close their long position or consider opening a short position.
Fractals
The Fractals indicator by Bill Williams is used to identify potential support and resistance levels in the market. The indicator draws arrows above or below the candles to show potential turning points in the direction of the price.
Mathematical formula: Fractals consist of two or more consecutive bars with common highs or lows. The first of these bars is called the primitive fractal. For an arrow to appear on the screen, there must be at least two higher/lower highs or lows on both sides of the primitive fractal.
Interpretation: The Fractals indicator by Bill Williams is used to identify possible support and resistance levels in the market. When the market reaches a fractal, this may indicate a possible change in the direction of the price. If the market is an uptrend, fractals are expected to form at the top of the candles. On the other hand, if the market is in a downtrend, fractals are expected to form at the bottom of the candles.
Parameters: There are no configurable parameters for the Fractals indicator.
Advantages and disadvantages: The main advantage of the Fractals indicator by Bill Williams is its simplicity and ease of use. It is easy to identify fractals on a chart, and they can be combined with other technical indicators to obtain more accurate trading signals. The main disadvantage is that fractals can appear after the price has changed direction, resulting in false signals.
Example with the EURUSD pair: In the following example, the EURUSD pair is shown on a 1-hour candle chart with the Fractals indicator by Bill Williams. Several arrows indicate potential support and resistance levels in the market.
Gator Oscillator
Gator Oscillator is a technical analysis indicator used to identify market trends and predict changes in the market. It is mainly used to measure market momentum and detect possible turning points.
Mathematical formula: The Gator Oscillator consists of two histograms that move up and down. These histograms are calculated (1) as the difference between the jaw balance line (the smoothed 13-period moving average) and the teeth balance line (the smoothed 8-period moving average) multiplied by a factor of two and as the difference between the teeth balance line (the smoothed 8-period moving average) and the lips balance line (the smoothed 5-period moving average) multiplied by a factor of two.
Interpretation: The Gator Oscillator is a momentum indicator that helps traders identify the trend direction and turning points in the market. The market is considered an uptrend if the upper histogram is above the lower histogram. The market is considered a downtrend if the lower histogram is above the upper histogram. In addition, if both histograms are moving up, this indicates strong bullish momentum, while if both are moving down, this indicates strong bearish momentum.
Parameters: The default parameters for the Gator Oscillator are as follows:
Jaw: Smoothed 13-period moving average
Teeth: Smoothed 8-period moving average Lips: Smoothed 5-period moving average
Advantages and disadvantages: An advantage of the Gator Oscillator is that it can provide precise entry and exit signals in trending markets. However, it can also generate false signals in sideways or non-trending markets, leading to losses.
Example with the EURUSD pair: On the daily chart of the EURUSD pair, the Gator Oscillator shows that the upper histogram is above the lower histogram, indicating an uptrend in the market. In addition, both histograms are moving up, indicating strong bullish momentum.
Market Facilitation Index (MFI)
The Market Facilitation Index (MFI) is a technical indicator used to measure the strength of market movements based on changes in volume and price. The MFI is commonly used to identify changes in market direction and confirm market trends.
Mathematical formula: MFI = (High - Low) / Volume
Interpretation: The MFI measures the effectiveness of price and volume in creating trading opportunities. If the MFI is high, it indicates that price movements are supported by substantial volume, meaning that the movement is likely to be sustainable. If the MFI is low, it suggests that the price is moving without strong volume support, meaning that the movement may be less sustainable. The MFI can also be used to identify changes in market direction. If the MFI is rising and the price is falling, it suggests that the price will likely change direction and rise soon. If the MFI is falling and the price is rising, it suggests that the price will likely change direction and fall soon.
Parameters: The MFI is calculated using the highest and lowest prices of the selected period, as well as the trading volume during that period.
Advantages and disadvantages: The MFI can help identify changes in market direction and is easy to understand and use for beginner traders. However, the MFI can generate false signals in markets with low volume.
Example with the EURUSD pair: Let's assume that the EURUSD has been in an uptrend and the MFI has been increasing, indicating substantial buying volume. However, the price of the EURUSD has started to decrease, and the MFI has also started to decrease.
This signal suggests that the uptrend may be ending, and prices may start to decrease shortly. In this case, a trader could use this signal to close long positions and look for selling opportunities.