After completing the training, the novice trader sets off on an independent “voyage” in the Forex currency market. The beginner learned how to build trends, add technical indicators to the chart , open and close positions. What else do you need to trade?
At one point, a trader realizes that the MetaTrader 4 platform contains not only the Moving Average, MACD and RSI indicators, which he was told about during his studies, but also that there are a lot of technical indicators in the terminal. Having entered the forum, a novice trader falls into an even greater shock – it turns out that there are also various modifications of these indicators, as well as the author’s indicators.
What to do? How to choose and set up a Forex indicator correctly?
Some beginners try to take the path of least resistance. They are looking for the Grail (since this article is primarily intended for novice traders , let us explain that the “Grail” in Forex slang means an indicator or an advisor that will bring its owner infinite wealth. – Ed.), Starting to trade with arrow indicators. Why bother? Downloaded, installed, enter the market when the arrow appears, but only have time to withdraw money from the deposit.
Such traders come to understand before others that there is no Grail in Forex. And for this understanding, unfortunately, they pay out of their own pocket.
So, having found out that arrow and signal indicators are unlikely to help make a million dollars by the New Year, a novice trader asks a fair question – so how can you choose the right Forex indicator?
Indicator – market thermometer
It is very important to understand the very principle of operation of any technical indicator – the indicator is formed by the price, and not the price by the indicator. Any indicator is an algorithm that uses historical data and visually interprets the calculation results. The decision is made by the trader INDEPENDENTLY based on the identified patterns in the indicator readings. The indicator does not care whether the FOMC has increased the interest rate, whether the ECB has expanded the volumes of the asset purchase program, it will show only what the current price dictates to it.
Figuratively speaking, an indicator is a thermometer. I looked at the thermometer – it was -10 outside. The indicator will not tell if it’s cold outside or hot. It just reports the temperature. And to put on a coat and a hat, or go out in jeans and a sweater, in the hope that it will soon get warmer – we already make the decision.
What are forex indicators?
It is necessary to understand that technical indicators are divided into two conditional groups:
The leading indicator signals a price reversal, making it possible to open a position at the very beginning of a new trend. The disadvantage of leading indicators is false signals that can lead to losses.
The lagging indicator gives a signal after the price has reversed, which increases its accuracy. The disadvantage of lagging indicators lies in their name – the signal appears after the price has passed a certain distance in the desired direction, and there is a high probability of opening a position at the end of the trend.
Also, a trader must understand what kind of information the indicator provides and what tasks it performs. For this, the indicators, according to their functionality, are divided into several groups:
- oscillators ,
- volume indicators,
- level indicators
Let’s take, for example, the standard MACD indicator of the MetaTrader 4 terminal related to oscillators. The crossing of the zero line by the histogram signals a change in the trend, and the divergence of the direction of the price and the histogram (divergence) signals an imminent trend change. It would be at least unsportsmanlike to wait for information on support / resistance levels or Pivot levels from the MACD oscillator.
Therefore, a trader must clearly understand what and why he needs an indicator, and how this or that indicator corresponds to the set goals.
How to set up a Forex indicator?
Choosing the right indicator is only half the battle. For two different traders, the same indicator can show completely different signals. It’s all about its settings.
It should be noted right away that there are no ideal settings for any indicator. They depend on the currency pair, timeframe, and more. Someone is trying to benefit from the default settings, someone is looking for advice on Forex forums, but in fact, the optimal settings for a technical indicator can and should be selected independently .
In order to find the optimal settings for the Forex indicator, you need:
- understand exactly what the indicator should show (trend strength, direction, support / resistance levels, divergences, and so on),
- determine the timeframe on which the indicator will be used, and it depends on the trading tactics,
- see how the indicator works on history and identify its inherent patterns,
- determine which signals the indicator gives – lagging or leading,
- select indicator parameters, achieving optimal signal quality. The ideal picture will not work, the main thing is to determine the parameters at which the indicator will give signals with the required frequency,
- test the indicator with the selected parameters in trading on a demo account or on a micro account.
At the same time, you need to understand that no indicator is perfect and does not give 100% correct signals. Any indicator will give false signals – this is normal. Such false signals can be filtered by other indicators, and losing trades must be closed on time.
It should also be borne in mind that the foreign exchange market is volatile. The optimal parameters of the indicator depend on the state in which the market is at the moment. If the number of stop losses has increased, this is a reason to revise the parameters of the indicators used.
Many traders prefer to trade without indicators at all, however, correctly configured forex indicators greatly simplify the analysis of the market situation and allow you to make accurate entries into the market, making the maximum profit.