MetaTrader 4 Indicators: A Quick & Dirty Guide
With all the fancy MetaTrader 4 indicators available today it’s easy get overwhelmed.
Which indicators should you use? And in what combination (and with what settings) should you use them?
The first thing to remember is that there is no perfect indicator. All MetaTrader 4 indicators like the popular MACD, RSI and Stochastic oscillator are simply mathematical formulas derived from market prices. They all occasionally give false signals… so there’s really no such thing as an indicator that can predict the future.
The trick thus, is to learn the strengths and weaknesses of each indicator, and to combine them so that the weakness of one indicator will be covered by the strength of another.
That being said, you probably shouldn’t use more than 4 to 5 indicators at the same time, because that would over-complicate your trading.
Diversify your MetaTrader 4 Indicators
As a rule of thumb, each technical indicator you use should perform at least on function that none of the others can. Put another way, try to avoid using indicators with overlapping functions.
For example, you wouldn’t want to use the RSI and the Stochastic oscillator together as they both indicate the same things: price momentum and overbought/oversold levels.
So the basic idea is to use a diverse set of indicators that each point out something different about the market you're trading.
Generally, you’d want to use MetaTrader 4 indicators that show:
- The market trend
- Potential support/resistance levels
- Overbought and oversold prices
- Current volatility levels
Another type of indicator you might want to use is one that signals when you should enter or exit a trade. Depending on your trading style however, you might want to simply use price action instead, since technical indicators tend to lag too much for accurate entries and exits.
Leading and Lagging MetaTrader 4 Indicators
A lagging indicator is one that describes certain characteristics of the market based solely on historical price data. For example, the moving average is a lagging indicator that tells you the market trend based solely on historical prices.
On the other hand, a leading indicator is a type of indicator that estimates where prices might reach some time in the future. It “leads” the market in the sense that the indicator “predicts” (i.e. estimates) where prices might go before they get there.
On top of historical price data, leading indicators usually incorporate some other concept found outside of the market such as Fibonacci principles.
For most cases, you’d want to use both leading and lagging indicators as they are useful in different ways.
For example, a lagging indicator such as a moving average can tell you that the market is still trending, while a leading indicator such as a Fibonacci retracement tool can tell you where to enter the trend on a pullback.
Indicators are Good Servants, Bad Masters
It’s easy to get preoccupied with indicators and waste time playing around with the different settings and combinations. This tends to cause traders to allow the indicators to dictate how they trade.
A better way to use indicators is to first have a trading philosophy, and then select the indicators that help you express that philosophy in your trading. This way, you focus your trading around your trade ideas instead of blindly taking every trade signal that the indicators throws up.
For example, if you think that the best trading opportunities are found in trending markets, you might choose to use trend and momentum indicators while ignoring range oscillator indicators.
Consider your Trading Style
Another thing to consider is your preferred trading style. After all, each indicator works well in certain situations, and less well in others.
For example, if you’re a scalper or day trader, you might want to use indicators that are more sensitive to recent and short-term price action.
On the other hand, if you’re a trend trader or swing trader those indicators will give you too many false signals so you might want to go with a smoother, less sensitive indicator for your trading.
Consider Different Market Phases
Because of the way they’re calculated, technical indicators tend to perform well in specific market situations, and poorly in others.
For example, in a steadily trending market, a moving average crossover signal can be a reliable trade signal to follow. However, if a market is trending in a volatile manner, the same signal will come too late as the price would have already moved significantly by then.
So depending on the type of market phase you’re in, you’ll want to use the type of indicators that perform well in that specific situation.
MetaTrader 4 Indicators You Might Use
Let’s now look at a few different types of indicators, and the the advantages and disadvantages of each.
The Stochastic oscillator was invented with the goal to help traders pick tops and bottoms, specifically by identifying changes in the momentum of price.
The idea is that in a bullish trend, prices tend to close near the highs and in a bearish market near the lows. This concept is integrated into the indicator’s formula and its values oscillate between 0-100.
Stochastic oscillator plotted below the candlestick chart
The Stochastic Oscillator is made up of 2 lines, %K and %D.
When the indicator moves beyond 80 and 20, the market is considered to be overbought and oversold respectively.
- The overbought and oversold signals together with Stochastic divergence predict tops and bottoms very well in a ranging market
- This indicator is relatively fast in generating signals compared to other similar indicators, which is good for short-term traders
- Not suitable for trend traders as this indicator will stay in the overbought or oversold territory in strongly trending market conditions
- Sometimes generates distorted signals because of sharp changes in the values of the indicator. This will happen when there are high volatility periods followed by low volatility periods, or vice versa
The Stochastic Oscillator indicator is available in the default MetaTrader 4 platform.
The Average Directional Index (ADX)
This indicator was developed to show the strength of the trend.
The ADX indicator is made up of 3 lines:
1. ADX line
2. +DI line
3. -DI line
ADX below the candlestick chart - The blue line is the ADX line, the green is +DI and the brown is - DI
To read this indicator, you need to know that:
- The ADX is a 2-in-1 indicator that’s reliable in identifying both trending and ranging market conditions
- It’s great for medium-term trend and swing traders
- Due to its heavily smoothed formula it’s a slow lagging indicator. Thus, it’s not a good indicator to use for trade entry and exit signals
- It’s not good at identifying market reversals
- It's bad for short-term Forex traders since short-term currency prices tend to be choppy, which leads to numerous false signals
The ADX indicator is available in the default MetaTrader 4 platform.
Parabolic SAR (Stop and Reverse)
This parabola-looking indicator is used determine when a trend is about to end by measuring trend momentum. It is thus often used by traders to set their trailing stops.
When the market is trending up, the Parabolic SAR will trail below the price. Conversely, when the market is trending down the indicator will trail above the price.
The Parabolic SAR on a chart
Due to its calculation formula, the indicator starts to slowly follow price at first, but as the price trend develops the dots accelerate with it and trails increasingly closer to the price.
- The Parabolic SAR is highly accurate at identifying good profit taking levels during strong market trends
- It’s visually intuitive and easy to understand and apply
- Works only in trending market conditions
- Is not reliable at doing much else other than identifying take profit levels during trending market conditions
The Parabolic SAR indicator is available in the default MetaTrader 4 platform.
This is an indicator invented by John Bollinger to measure price volatility.
It consists of 3 lines: The upper band, the lower band, and the middle band which is a standard simple moving average.
The main purpose of this indicator is to signal whether prices are relatively high or low. When the market price touches the upper band, it is considered to be too high. Likewise, when the market price touches the lower band, it is considered to be too low.
Bollinger Bands in blue. The bands contract when the volatility is low and widen when volatility increases.
The main benefit of Bollinger Bands is that it is responsive to ongoing market conditions. When volatility is high, the distance between the upper and lower bands widen. Conversely, when volatility is low, the distance between the upper and lower bands narrow.
Traders use Bollinger Bands to identify good areas to buy and sell. Generally, they buy when prices reach the lower band, and sell when prices reach the upper band.
- Approximately 90% of all price movement will be contained within the Bollinger Bands. This means that the upper and lower bands are statistically good areas to be selling and buying, respectively.
- It’s especially useful for range and swing traders
- Only reliable during stable ranging conditions. It’s especially ineffective during strongly trending conditions
The Bollinger Bands indicator is available in the default MetaTrader 4 platform.
Pivot points are designed to show the probable range of market prices for a given trading period.
This indicator is composed of 7 lines: 3 support lines (usually called S1, S2, S3), 3 resistance lines (usually called R1, R2, R3) and one middle line which is called the pivot point. It works on any time period. There are 1 hour pivot points, daily pivot points, weekly pivot points, monthly pivot points and even yearly pivot points.
The general consensus is that there’s a 70% probability that the market will move to the middle pivot line over the given time period. This can be seen in the chart below:
Pivot points on an intraday chart. The blue lines are the main pivots for the given day. The red line is R1 and the green line is S1. The other support and resistance pivot levels are not shown for clarity purposes
There are 2 main ways traders use the Pivot Point indicator:
- Pivot point levels identify the price levels at which the market is statistically likely to move towards
- Is especially useful for short-term traders
- It’s a leading indicator
- Can be used to identify price levels at which a market is overbought or oversold
- Pivot support and resistance levels can be good areas to beyond which to set stop loss orders
- Not effectice during strongly trending market conditions
- Multiple pivot lines clog up the chart, confusing the trader
- There are various versions of the Pivot Point indicator, each with a different calculation formula. There is no standard Pivot Point indicator that pivot traders follow.
Download the Pivot Point MetaTrader 4 indicator here: Pivot Points
My Favourite MetaTrader 4 Indicator Among These
At the beginning of this article, I mentioned that your indicators should serve your trading style.
Now since I’m a medium-term (swing and trend) trader, I prefer indicators that are slower but more reliable. This means that sensitive indicators such as the Stochastic Oscillator isn’t appropriate for me.
So if I had to pick a favourite amongst the indicators mentioned, I’d pick the ADX because one of the biggest challenges I face is identifying when the market is trending, and when it isn’t.
The ADX is thus valuable to me because it provides me with a benchmark with which to alternate between trend trading and swing trading strategies.
In other words, when the ADX indicator tells me the market is trending, I’ll use trend trading strategies. And when the indicator tells me the market is ranging, I’ll switch to range trading strategies.
This may or may not appeal to you, and that’s the point. There are so many MetaTrader 4 indicators available that there are a practically infinite number of trading systems and strategies that you can express with them.
The key is to first understand the type(s) of trading styles that suit your personality, and then (and ONLY then) select the indicators that best express that trading approach.
In that sense, all MetaTrader 4 indicators are useful. It’s how and why you use them, that matters.
Let me know what you think in the comments below, and please share this article if you enjoyed it!