How to choose and set up an indicator ?
Having completed the training, a beginning trader sets out on his own "voyage" through the currency market. A beginner learns how to build trends, add technical indicators, open and close positions. What else do you need to trade?
At one moment the trader understands 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. After visiting the forum the beginner gets even more shocked - it turns out that there are various modifications of these indicators, as well as author's indicators.
What to do? How to choose and set up the -indicator correctly?
Indicators-Graali
Some newcomers try to take the path of least resistance. They are looking for the Grail (as this article is intended, first and foremost, for novice traders, We explain that "grail" in -slang means an indicator or advisor that will bring its owner infinite wealth. - Editor's note), starting to trade with arrow indicators. Why bother? Download, install, enter the market when the arrow appears, but just have time to withdraw money from the deposit.
Such traders come to the understanding earlier than others that there are no Grails. And for this understanding, unfortunately, they pay from their own pockets.
So, having found out that the arrow and signal indicators are unlikely to help earn a million dollars by the New Year, the novice trader asks a fair question - so how to choose the right indicator?
Indicator - market thermometer
It is very important to understand the principle of any technical indicator - the indicator is formed by the price, not the price by the indicator. Any indicator is an algorithm that uses historical data and visually interprets the results of calculations. The trader makes his/her own decision based on the identified patterns in the indicator readings. The indicator does not care whether the FOMC has increased the interest rate or the ECB has expanded the volume of the asset purchase program, it will only show what the current price dictates.
Figuratively speaking, the indicator is a thermometer. You look at the thermometer - it's -10 outside. The indicator will not tell you if it is cold or hot outside. It just tells you the temperature. And it's up to us to put on a coat and hat, or go out in jeans and a sweater, hoping that it will get warmer soon.
What kind of indicators are there?
It should be understood that technical indicators are divided into two groups:
- outpacing,
- lagging.
Leading indicator signals about the price reversal, giving an opportunity to open a position at the beginning of a new trend. The disadvantage of leading indicators are false signals, which can lead to losses.
Lagging indicator gives a signal after the price has turned, 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 right direction, and there is a high probability of opening a position at the end of the trend.
Also, a trader should understand what information the indicator provides and what tasks it performs. For this purpose indicators are divided into several groups according to their functionality:
- trending,
- oscillators,
- volume indicators,
- information,
- channel ones,
- level indicators
and so on.
Take, for example, the standard MACD indicator of the MetaTrader 4 terminalrelated to the oscillators. A histogram crossing the zero line signals a change in the trend, and a divergence between the price direction and the histogram (divergence) signals the imminent change in the trend. It would be at least unsportsmanlike to wait for the MACD oscillator to provide information about support/resistance levels or Pivot levels.
Therefore, the trader must clearly understand what kind of indicator he needs and why, and how this or that indicator corresponds to the goals.
How to set the indicator ?
Choosing the right indicator is only half the battle. For two different traders, the same indicator may show completely different signals. It's all about its settings.
It's worth noting right away that there are no perfect settings for any indicator. They depend on the currency pair, timeframe and much more. Some people try to take advantage of the default settings, some look for advice on -forums, but in fact optimal settings of a technical indicator can and should be chosen independently.
In order to find the optimal -indicator settings, you need:
- to understand exactly what the indicator should show (trend strength, direction, support/resistance levels, divergence, and so on),
- determine the timeframe in which the indicator will be used, and it depends on the trading tactic,
- see how the indicator works on the history and identify its inherent patterns,
- determine whether the signals are lagging or leading,
- choose the parameters of the indicator, achieving the optimal quality of signals. You will not get a perfect picture, the main thing is to determine the parameters, at which the indicator will give signals with the required frequency,
- to test the indicator with the selected parameters in trading on a demo account or on a micro account.
It should be understood that no indicator is perfect and does not give 100% correct signals. False signals will be given by any indicator - this is a normal phenomenon. Such false signals can be filtered out by other indicators, while loss-making trades should be closed in time.
It is also necessary to take into account that the currency market is not constant. The optimal parameters of the indicator depend on the state the market is in at the moment. If the amount of stop loss increased - this is a reason to reconsider the parameters of the indicators used.
Many traders prefer to trade without indicators, but properly configured indicators greatly simplify the analysis of the market situation and allow you to make accurate entries into the market, extracting maximum profit.
Thank you, very useful article. It is very difficult to understand this financial ocean by myself.
One indicator is not enough, but all at once is not an option either. It is necessary to use an indicator to track the trend and the one that will help you choose the best entry point.
Beginners, as a rule, underestimate the importance of indicators and do not neglect them and lose significant amounts.
The main thing is to choose the right indicators and learn to combine the information they provide, otherwise losses are also inevitable.
Newcomers, in general, find it difficult to navigate in the world of indicators, sometimes, until they master this tricky science, they lose a lot of money.
You have to have several indicators, and oscillators, and work on most of the matching signals.
Reasonable. But how many is a few? If two is not enough, then three is enough, or five or six necessary assistants will be enough to analyze the state of the market? For me, as a beginner, it is difficult to decide even on the number of indicators.
When it's hard to figure out the number of indicators, it's advisable to start with just a ready-made trading strategy. While you're testing it, you'll figure out what you need and for what purpose.
Do not use too many indicators, you can get confused. A lot of information, where you need lightning-fast decisions - it's bad for the wallet. Two or three will suffice. Only it is necessary to select them competently, for oneself. The choice of the appropriate indicator can only be made by trial and error. There is no other way.
For those with little MACD trading experience, two parallel straight lines and regular candlestick analysis are optimal for catching and recognizing a signal. You can also use those indicators which are of interest to you, but you should not get carried away with too many indicators, as you can get confused in the chart.
I second that, I also added a moving average (7 or 21).
I prefer to work with leading indicators, and to avoid getting caught in a false price reversal, there is a head on shoulders.
And what indicators do you use?
Thank you so much, as a newbie in this business she has been a good teacher to me!!!!