MetaTrader Indicator

Forex traders who favor the technical approach for attempting to predict future price levels frequently employ a variety of indicators to assist them in deciding whether to buy or sell a currency pair, whether to continue with or close an existing transaction, or whether to simply observe the market for an opportune trading signal.

One of the most popular trading platforms, utilized by both discretionary and automated systems traders, is MetaTrader. MetaTrader has an extensive list of indicators that can be customized in multiple ways to adapt to the unique characteristics of different currency pairs and different levels of market volatility.

Some of these indicators, stochastics and the moving average convergence/divergence (MACD) indicators for example, are referred to as oscillators, meaning that they swing back and forth around a horizontal zero line to indicate when a market is in either an overbought or an oversold condition. These types of indicators are displayed on a graph below the chart showing price activity.

Others, are displayed directly on the chart, referred to as overlays and it is one of these, Bollinger bands, that we will examine in more detail.

Bollinger bands were developed in the 1980s by John Bollinger as a way to compare the relative highness or lowness of prices compared to those that were in effect for previous trades.

The mathematical formulas involved in determining the way the bands are displayed on a price chart are not particularly complex, but it is not even necessary to know them in order to effectively use them.

MetaTrader does the math automatically according to trader determined parameters.

The default settings can be used or a trader can experiment to see what changing one setting or another does to the results displayed.

The Bollinger indicator typically displays on the price chart as three lines that meander along in conjunction with the up-and-down swings of currency pair prices.

The centerline is a moving average of a selected number of price periods. MetaTrader’s default setting for this moving average is 14. In other words, on a one minute chart, the moving average is comprised of the prices over the last 14 minutes. On a one-hour chart, the moving average depicted represents the average of the last 14 hours. Meta-trader permits this value to be adjusted and many traders will increase it during times of stable prices and decrease it when prices are changing rapidly. Some traders will also adjust the moving average value according to the currency pair being considered. For example, the AUD/USD, which often has fairly high volatility and therefore dramatic price swings, will have the moving average set for a shorter time period than for a more sedate currency pair, such as the USD/JPY.

The upper and lower bands of the Bollinger indicator are by default set at two standard deviations in MetaTrader. This value can also be adjusted upward to display a wider price channel or downward for a narrower channel.

Regardless of what setting is chosen for the upper and lower bands, the net result very much resembles the banks of a river or stream that is flowing from left to right on the price chart.

Just as a river or stream spends most of its time within its banks, currency prices are usually contained within the upper and lower bands.

To take advantage of this characteristic, buy orders are placed when prices are either on, near, or have broken out of the lower band, then return inside. Sell orders are indicated when prices are either on, near, or have broken out of the upper band, then return inside.

Like all technical indicators, Bollinger bands are not in fallible. If they were, there would be no Forex market.

Many traders feel that the best use of Bollinger bands is to indicate exits rather than entries.

In any event, it is prudent to experiment with MetaTrader’s Bollinger band indicator extensively on your simulated trading account until you’re comfortable and confident with the signals it supplies. Learn more about Metatrader and the Forex market by visiting www.lucrorfx.com, today.

 

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