Tools for great analysis part 1

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The majority of traders out there are considered to be technical traders, meaning, they use some additional tools for their analysis of the market and decision process. Those tools vary, depending on the strategy and style of the trader itself, but they can be put in two categories:

  1. Indicators

  2. Oscillators

Now, there are tons of both, and I will surely not be explaining all of them. But the important ones I have used or am using still will be covered in this blogpost for sure.

First thing first, what is an indicator? An indicator is considered as any statistic that is used to predict and understand financial and economic trends, as mentioned on Investopedia.

There are two common types of indicators, leading and lagging. Leading indicators point forward future events, while Lagging is seen as confirmation of a pattern that is currently happening.

Oscillator’s definition says that oscillator is a technical analysis tool that constructs high and low bands between two extreme values. They are mostly used to pinpoint potential trend reversal. Usually, traders use them to find overbought or oversold areas for the currency pair of their interest.

Indicators and Oscillators are mostly used in combination, together. An example of it can be a strategy using Moving Averages along with Stochastic Oscillator.

Trend Indicators I love and use

Here is a shortcut on how you can add any indicator if you are using the MT4 platform. Pretty straightforward process, isn’t it?

To be honest, the two indicators I use most are Moving Averages and Ichimoku. Since I am developing strategies I have combinations of indicators and oscillators I use, but moving average and Ichimoku are my favorites.

Moving Average Indicators

Investopedia defines moving average as a technical indicator that smooths out price trends but filtering out the ‘’noise’’ from random short-term price fluctuations. There are 4 common types of moving averages as shown in the pic below:

We have Linear Weighted moving average colored white, Simple moving average in orange color, Exponential moving average in gold color and Smoothed moving average in light blue. All 4 moving averages are with the same value of 21.

Now, I don’t use them all, I prefer using Simple and Exponential moving averages. The simple moving average is showing the price from the last candle excluding the last one for the x period of days (where x is the value you put for the moving average itself, in our example, 21).

The exponential moving average is showing the price from the last candle including the last candle as well as its value (21 periods in our example).

As you have already guessed, the exponential moving average can be quicker with the entry signals, but it can also give more false signals. Both moving averages have their cons and pros. And I use them in combination, almost always.

There are tons of strategies using combinations of moving averages, like crossovers of 10 and 20, a combination of 20, 50, and 200 for example. And so on.

The best way you can go along with them is to add them to your charts and start practicing on a demo account.

Ichimoku Kinko Hyo

Ichimoku, such a beautiful name, isn’t it?

Are you confused with the look of this indicator? I was confused as well, once I first added it to the charts.

All looked like a huge mess to me. All those lines, clouds, then line again. Nothing had sense to me at all.

But then I read a couple of books about it, watched tons of videos, and all came to sense. Now, Ichimoku is one of mine most favorite indicators out there.

It consists of:

Tenkan Sen, colored red, is the sum of the highest high and lowest low divided by two, calculated in the last 9 periods.

Kijun-sen, colored blue, is the sum of the highest high and lowest low divided by two, with calculation taking the last 26 periods.

Chikou Span, colored lime, is calculated using the most recent closing price and is plotted 26 periods behind the current price action.

Kumo Cloud Up or Senko Span A, in light brown color, the sum of the Tenkan Sen and the Kijun Sen divided by two. It is plotted 26 periods ahead of the current price action.

Kumo Cloud Down or Senko Span B, in light purple color, is the sum of the highest high and the lowest low divided by two for the last 52 periods plotted ahead of the current price action for 26 periods.

Now, Ichimoku Kinko Hyo translated from Japanese means “Market at a glance”. And that is great for all types of traders since this indicator helps a lot with quick decision making.

 

I know, this sounds hard to even read. Doesn’t it?

But once you add Ichimoku to your chart, and demo trade it for a while, it becomes clear. And it surely becomes one of your best indicator setups.

Why?

Well, it has it all. Moving averages, the strength of the market, support, and resistance zones.

In some future blog posts, I will write about how I trade the Ichimoku, you will love it. Trust me.

 

Oscillators

Average True Range

This oscillator is considered a volatility indicator that shows how much an asset moves, on average, during a given time period. I use the default setting for it, the 14 periods, which is showing for how many points or pips the market moved in the past days.

For this chart, AUDUSD on Daily timeframe the important number is 0.0058, which when transferred to pips is 58 pips. This represents the average movement of the pair for the past 14 days.

This oscillator is good for your stop loss and take profit settings. I usually use the 1.5 value of the ATR for stop loss and a minimum of 2 times the value of the ATR for take profit.

Stochastic Oscillator

A stochastic Oscillator is a momentum indicator that calculates whether the price of a security is overbought or oversold when compared to the price movement over a specified period of time.

Some strategies using Stochastic tend to be lucrative, but my opinion is that if you haven’t used it before, always go for the demo trading first.

Stochastic consists of two moving lines fluctuating between two horizontal lines. I know, there are three horizontal lines there but I prefer to have a 50 level added as well, it shows me when it is a good time to add to a position or get out of one.

Cross of the moving lines below the first, lower, horizontal line is a buy signal for me (if the price action is in the right way), the cross of the moving lines from the second, higher horizontal line is usually a sell signal for me.

The zone around the lower horizontal line is called the oversold area, the zone around the higher horizontal line is considered as an overbought area.

Traders who use Stochastic tend to buy in the cross of the moving lines in the oversold areas and sell when the cross of the moving lines happens in the overbought area.

 

I think this is enough for now, I don’t want to add too much material for you in one blog post and make you read a long time.

Use this, if you haven’t before, and always go with the demo account first, test it out and if it works for you, great, go live and make some money.

You deserve it!

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