So, with the main issues sorted out, now let’s move on to practice. Let’s see how various indicators are configured and how to use them. We will do this on the basis of the simplest, basic trend indicator – Moving Average, or Moving Average (MA).
This indicator uses the simplest formula in its calculations – it calculates the average price value over a period of time and gives these values in the form of points on the price chart that are connected by a line. So, let’s set up this indicator:
- First of all, open our trading terminal and display the chart of the trading instrument of interest to us. In our case, this is the EURUSD currency pair ;
- In the price chart settings window, select the “indicators” tab;
- We will be offered a fairly extensive list of all indicators that are available in this trading terminal. We need to select the indicator of interest to us from the list. We find it and click on its name. After that, the indicator will appear on the chart;
- To close the indicators menu, press “X” in the upper right corner;
As you can see in the figure above, the indicator is a blue line that passes through the price chart and often crosses it. These places of intersection or touch are the main points in the work of this indicator. They indicate the direction and strength of the trend currently in effect on the price chart. If the price chart crosses the indicator line from bottom to top, an uptrend has begun to operate. If the price chart crosses the indicator line from top to bottom, a downtrend has begun to take effect. The farther the price chart is from the indicator line, the stronger the current trend. If the market is in a lateral state, the indicator line will be located in the middle of the lateral range. So, we added the indicator, now we will deal with its settings;
- To call the indicator settings menu, right-click on the indicator line and select “settings”;
- The indicator settings window will open. In the menu above we select, for starters, the item “Style”;
- We are invited to choose a color, for example, red;
- Next, select the line thickness of the indicator itself. From experience, I’ll say that we will further adjust the averaging period, and it is better to adjust the line thickness for this parameter. The larger the period value, the thicker the indicator line – you remember that the indicator data is a range, not the actual value. So, the thicker the line, the wider the range and the wider the filter of our possible errors;
- The next step is to select the type of indicator display. By default, we have “Line”;
- The next paragraph goes to the “parameters” or “arguments” tab; eleven.
We are invited to configure 3 parameters, the first of which is the most important “length” or, as it is called in the classical analysis, “averaging period”. This number indicates the number of time periods on the chart for which the average price value will be calculated. As we already know, the time period on the chart is called a timeframe, and therefore, if the period is H1 or one hour, then with the set length parameter 21, the average price will be calculated every 21 hours. These points will be connected by a line that is displayed on our chart. The choice of the value of the averaging period should be approached very carefully, because the type of your line depends on it, and therefore how quickly and accurately the indicator will respond to changes in the price chart. This parameter is not taken from the air. Although many new traders set this parameter instinctively. Of course, there is a certain probability that you can get to the point, but nevertheless, it is better to rely on mathematical laws. So, the basis of the calculation of averaging periods for all indicators of mathematical analysis is the numerical Fibonacci sequence.Fibonacci numbers- elements of the sequence – 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, …, in which the first two numbers are either 1 and 1, or 0 and 1, and each subsequent number is equal to the sum of the two previous numbers. Named after the medieval mathematician Leonardo of Pisa. So, based on this sequence, most of the dependencies in the technical analysis are calculated. Moreover, concepts such as trend and correction are calculated precisely on the basis of the principles of the Fibonacci Golden Ratio. And, you guessed it, the averaging periods for indicators at the dawn of mathematical analysis were taken only from the Fibonacci number series. Subsequently, another method was developed – to determine the periods based on the number of calendar working days of the exchange by periods: trading week – 5 days, 2 weeks – 10 days, the trading year is approximately 200 days. This probably led to the most common value of the period for the exponential moving average on the daily chart D1 – “200-day”, that is, with a period of 200. I have already written many times in my articles that I am an ardent opponent of modern technical analysis and prefer “ old school ”, from which I use only the first method and nothing else. So, by default, we are offered a period of 9. In the Fibonacci sequence, there is no such value, and therefore it must be changed. But on which one – it already depends on the tasks that you set before the indicator. If you want the indicator to react more sharply to a change in the price chart – choose a shorter period, if you want a smoother reaction – choose a longer period. Let us establish perhaps the most universal period of 21;
- The following is another parameter that affects the appearance of the indicator line – “data”. This parameter indicates the price, on the basis of which the parameters will be taken to calculate the average price. As we know, we have 4 types of prices for the period: closing price, opening price, maximum and minimum. In addition to choosing these values, there is an option to use several parameters at once, or you can use all 4 prices at the same time. Many do not know, but, again, the result strongly depends on this parameter. If we select the closing price in the parameters, then according to this indicator it is better to track the moments of the end of trends, and if we choose the opening price, the parameters of the trend start are more clearly aligned;
- The third parameter is the so-called deviation from the normal or “indent”. this parameter shifts the line horizontally by the number of periods indicated in the value field;
- After setting, click the “OK” button;
Now our graph has become a different kind, and due to the larger value of the averaging period, it began to filter out noise vibrations.
The indicator is configured. Now let’s look at the methods of work on it and other indicators.