Technical analysis is an integral part of Forex trading. This is a set of tools designed to examine charts and make well-informed decisions. The main assumption of the technical analysis method is the idea that price fluctuations cause changes in the future. To predict the movement of the price curve, traders, analysts, and mathematicians have invented many indicators.
The main indicators help Forex participants to study the current market state, its potential direction, and the strength of trends. The most common and effective technical tools are included in well-known trading platforms like MetaTrader 4. Below, we will explore the best indicators for MT4. You’ll learn how they work and how to use them effectively.
What Are MT4 Indicators?
MT4 trading indicators are special tools designed to make predictions about price changes in financial markets. They rely on the in-depth analysis of historical data, trading volumes, and other variables. Such tools help traders identify major market trends, support and resistance levels, strength of the trend, and potential reversal points. The right choice of indicators can significantly increase the effectiveness of a trading strategy. Here is a list of the functions the best indicators can perform:
- Trend analysis. Trading indicators help to understand the general price direction ― up, down, or sideways. The most obvious example is moving averages.
- Determining momentum. Indicators such as RSI (Relative Strength Index) or Stochastic measure the speed of price movement to determine how strong the current trend is.
- Volatility assessment. This is a measure of how widely prices vary. Volatility indicators help understand the level of market unpredictability.
The MT4 platform supports standard technical indicators that we’ll study below and custom indicators that users can easily install. To do this, you should download a special MQL4 file and add it to the MT4 indicators list. However, if you are a beginner, you’ll be completely fine with the default set.
Criteria for Selecting the Best MT4 Indicators
When we say, “best MT4 indicators”, a question arises: “What are the criteria for assessing an indicator as the best?” Unfortunately, this question doesn’t have an only answer. Traders strive to find the tool that outperforms others but never succeed. The reason is that different indicators are good at solving different tasks. Therefore, we should employ a combination of the tools. Here are some criteria that our toolset must meet:
- Profit/risk ratio. If the indicator gives more true signals than false ones, we consider it effective. The ratio can vary, and many traders look for the paid tools with the best reputation.
- Simplicity of use. Some indicators are too advanced for regular Forex participants. You can spend more time analyzing the chart than making a decision. Simple tools like MAs or RSI on the other hand give an immediate insight.
- Matching your timeframe. MT4 best indicator should fit your strategy and be useful in a certain timeframe.
- Price. Some traders are looking for the most expensive indicators, but they don’t always become magic pills that increase your performance dramatically.
Surprisingly, professional traders don’t pursue the most sophisticated tools. They rely mostly on the chart and the simplest tools available on the MT4 platform.
Top MT4 Indicators
Users can find on the Internet the top 3, top 7, or top 10 MT4 indicators. Obviously, the selection is subjective. We have gathered the tools that serve different purposes and can be incorporated into different strategies. Here is our list:
- Moving averages;
- Relative strength index;
- Bollinger bands;
- Moving average convergence divergence;
- Fibonacci retracement;
- Stochastic oscillator;
- Heikin Ashi.
Most of them were developed decades ago and have proved their effectiveness. Below, you’ll learn how to use them and why they work.
Moving Average (MA)
Moving averages are trend indicators. They allow you to see the general direction of the trend while smoothing out fluctuations. The method is based on calculating the medium price for a certain period. In addition to the trend direction, traders often look at the intersection points that indicate the strength of a trend. MAs are also used for the calculation of support and resistance levels. This is one of the simplest technical analysis tools and arguably the best trend indicator MT4.
Relative Strength Index (RSI)
The RSI was developed in 1978 by famous analyst John Welles Wilder. It is used to measure the strength and speed of price change of a currency pair in the Forex market. RSI is an oscillator that shows the financial instrument’s overbought or oversold levels.
To calculate the indicator, you should compare the average profit and average loss over a certain period (usually 14 candles). This allows you to determine when the price has reached its biggest or smallest value. When using the RSI, values above 70 are considered overbought and below 30 ― oversold. They indicate the right moments for opening or closing positions.
To use the RSI, you need to configure its parameters and define signal levels. First, select the period. Wilder recommended using 14 periods (e. g. days). Then change the levels if you think 70 and 30 are inappropriate. In MetaTrader 4, you can adjust other settings and see the curve under the price chart.
Bollinger Bands
The Bollinger Bands indicator is also used quite often in MT4. It can help determine market volatility and predict further price movement. The indicator looks like a channel consisting of two lines. One of them is situated above the price curve, the other ― below it.
The width of the band clearly indicates how volatile the market is. The narrow Bollinger Bands channel signifies a calm market, and its expansion tells us about the extreme volatility. When trading with this indicator, traders take into account how the price behaves within the lines.
MACD (Moving Average Convergence Divergence)
The MACD (Moving Average Convergence/Divergence) indicator is used to find trends. As soon as you activate it in MT4, you will see two lines. One will be red, the other ― blue. They may intersect or diverge. Each line is a moving average of a certain period (one is always shorter than the other).
When the faster MA crosses the slower one, we can make an assumption about the emergence of a new trend. Further divergence of these two lines will signify the development of the trend. The histogram displays the strength of the trend: the longer the bars, the stronger the trend. Once the fast line returns and crosses the second line again, you can expect a trend reversal.
Fibonacci Retracement
Correction or retracement is a movement against the existing trend. It typically consumes part of the trend movement while not affecting the main direction. To calculate the correction levels, the Fibonacci retracement tool usually comes in handy. The most common levels are 38.2%, 50%, 61.8%, and 78.6%. They are calculated from the previous trend movement.
Correction levels are built automatically in MT4 on the highs and lows of the candles. To build horizontal lines that will help you set orders, you first need to find a trend. You can use other indicators to detect the beginning and set the first line as the 0% level. Then, find the Fibonacci retracement tool in the menu bar and activate it.
Stochastic Oscillator
The stochastic oscillator is situated under the main price chart and compares the closing price of the bars with the previous interval. It is an instrument displayed with two lines. The first one shows the value of the indicator itself, and the second one ― the value of its MA. The stochastic oscillator can be calculated for different periods, but the most common time interval is 5 days.
The indicator is represented as a percentage. If the value is above 80, the closing price is near the upper limit of the range, if below 20, it is near the lower one. Many traders consider it the best indicator MT4 because they can obtain many signals from it. Here are the parameters you should pay attention to:
- Divergence with the price curve;
- The level of the stochastic lines;
- The direction of the lines.
The indicator can signal the reversal and the beginning of a new trend. For example, if the main curve is above 80 and forms two peaks, while prices continue to rise, the bearish trend may begin. The bullish signal is a double bottom under the level of 20.
Heikin Ashi
Heiken Ashi is an alternative technique for representing price movements. It is similar to a regular candlestick chart but still has certain specifics. For example, Heiken Ashi charts do not allow you to read the actual price levels, but they make it easier to follow the development of trends and their reversals.
The main goal of Heiken Ashi is the demonstration of the price trend. That’s why they look like a smoothed version of Japanese candles. Rising Heiken Ashi bars are usually white, and downward candles are red. They also have wicks. Switching the color of the candlesticks means a change in trend. Red to white is a reversal of the bearish trend, white to red ― a reversal of the bullish trend. They come in handy when you need to quickly evaluate the market conditions.
Combining Indicators for Optimal Results
To become a highly profitable trader, it is necessary to combine different indicators. Among hundreds of different combinations, we have selected two pairs and one fundamental union that can help you make better decisions:
- Moving Averages and MACD. The combination of MAs and MACD is effective in analyzing the trend and giving buy or sell signals. When the fast MACD line crosses the slow line upwards and is above the MA line, this can indicate a possible increase in price. At the same time, if the price is above the moving averages, this can be interpreted as a buy signal.
- RSI and Bollinger Bands. The two technical indicators we have studied above can be a good match. When the RSI is above 70 (or 80), it can indicate overbought conditions and a possible decrease in price. Bollinger Bands that show the price volatility can give additional insights about the entry point.
- Fundamental and technical analysis. The technical tools are extremely important, but their efficiency can be increased significantly by adding fundamental understanding. For example, if you see a buy signal but an economic report is going to be issued at the same time, it is better to wait until it is released to avoid possible risks.
When choosing the best MT4 indicator combination, you need to consider your trading style, preferences, and experience. Do not use too many indicators, as this can lead to a cluttered chart and make analysis difficult. It is better to choose a few basic tools and study deeply how they work together.
Common Mistakes to Avoid
The pure candlestick chart gives traders much information, but analyzing candle patterns is not as simple as using MetaTrader 4 built-in indicators. That’s why beginners start delving into the various technical tools and make many mistakes. Here are some of them:
- High expectations. Most beginners think that indicators never make mistakes and that there are paid tools that will work as the money printing press. That’s not true. You should always understand the risks and act accordingly.
- Overloading with indicators. Combining different tools is a good idea unless you place more than three instruments on the chart. In this case, they only distract your attention.
- Neglecting bankroll management. Even if you are confident in the signal, you should keep your budget in your mind. Otherwise, a margin call may appear.
No trader can avoid making mistakes, but when you know potential pitfalls, you can learn from them and avoid the same problems in the future.
Conclusion
MT4 technical analysis indicators are important tools for assessing the Forex market and making trading decisions. Using such tools helps identify possible entry and exit points. From this piece, you have learned the top 7 best free indicators for MT4 and their combinations. Mastering trading requires attention and a deep understanding of the main tools.
However, to automate your work, you need other instruments. A good option to increase productivity is the best Forex robots. They can quickly analyze dozens of indicators and give you professional advice. Continue practicing, and you'll be able to achieve tremendous results in the financial market.
