Adding Indicators, Overlays and Reading Price Action

 

Video Transcription:

Hey, traders. Welcome to Video 7 of The Forex Beginners course. This is
Cory Mitchell. In this video, we are looking at adding indicators and
overlays to your price charts and reading price action, brought to you by
Investoo.com.

Forex indicators are mathematical tools that manipulate the price data.
Some traders find them very useful for spotting entries, exits, trends, and
reversals. An indicator will appear separate from your price chart, so it
will commonly appear below depending on how you have your trading platform
setup.

All indicators do is manipulate the price data, so traders shouldn’t rely
solely on indicators. Knowing how to interpret price action is more
important. Popular indicators include RSI, Stochastic, MACD, and Average
True Range.

Overlays appear right on the price chart, so it’s like they’re on top and
moving with your price data. Overlays are also functions of price and,
therefore, shouldn’t be relied on exclusively. Popular indicators include
moving averages, Parabolic SAR, Fibonacci Retracements, Fibonacci
Extensions/Expansions — some call them extensions; some people call them
expansions — and Bollinger Bands.

Price is the ultimate indicator. It is what is going to make or lose you
money, nothing else. An indicator can be screaming for you to buy or sell
or do something, but until the price actually does it, there is no money to
be made. The price is what makes you money. Traders mostly focus on trends,
as that is where the money is.

An uptrend is when price waves are making overall higher highs and higher
lows. A downtrend is when the price waves are making overall lower lows and
lower highs. These simple concepts can help us become a better trader. This
is what we call reading price action, and there are a whole bunch of
nuances. This is a basic introduction, but it will even help you apply
indicators better.

We’ll look at some examples of that, where an indicator may give a buy
signal, but you can tell from your price analysis that we’re actually in a
downtrend. Instead of buying, you’re going to skip that signal and wait for
the indicator to give you a sell signal. You want to use your price
analysis in conjunction with your indicators.

Indicators do not typically filter anything else. They’re just calculating
raw data, so they spew out a lot of trade signals based on a lot of methods
that people have developed, but that doesn’t mean that you want to take
every single signal that an indicator or an overlay gives you.

We need to be able to read price action on our own to have some objectivity
in what trade signals we’re going to take when we use indicators. We can
just use price action alone. I rarely use indicators, myself, almost never.
I simply trade off price action alone, because it is what makes money. If
you can read the price action, you’re going to get lots of trade signals
anyway.

Remember, indicators only tell you what the price is doing. They’re just
doing it in a different way. They’re manipulating it in some way, maybe to
make it more visually more appearing, to show it moving up and down, all
sorts of things that it does, but it doesn’t necessarily mean that it’s
changing the data in any way or giving you an advantage. All it’s doing is
changing it to make it more visually appealing.

Let’s look at a price chart here. First, let’s look at how we add
indicators. We have indicators, a whole bunch of them listed here. A couple
popular ones are… MACD is a popular one. We can see, we click on it, and
it pulls up a little box where we can change some of the parameters of it,
what it looks like.

The most important ones are these here. It’s going to fill in these boxes
for you with what we call the default settings. Whoever came up with this
indicator, this is the default setting that they recommended.

What these are is they’re just showing you the calculation periods used to
make the indicator. When it says nine, that means it’s using nine periods
for that particular calculation. I’m looking at a five minute chart; that
means it’s using the last nine bars in that part of the calculation.

This part of the calculation is using the last 26 price bars. If I was
using an hourly chart, it would still be the last 26 bars. Changing the
timeframe doesn’t really matter. This one is using last 12 price bars,
whichever they happen to be: five minute, one minute, hourly, dailies.

Now we can add it to our chart, and we can see that it pops up here.
Another popular one is the RSI or Relative Strength Index. Once again, we
have the periods pop up here. 14 is the default. We can add that.

When I was talking about the indicator just moving up and down, this is
what these indicators are like. They’re what we call range-bound indicators
or oscillators. They just oscillate back and forth. Regardless of what the
price does, all these things are going to do is swing back and forth.

They do provide some insight. They can help you confirm trends. As you can
see, this one turns into an uptrend, actually, when we do see the price
uptrend turn. They are helpful in that aspect, but usually what we see on
an indicator we can also see happening in the price. If we want to get rid
of those or edit them, say we want to change the settings, we can just
click on the one we want, click edit, change any settings we want in here,
or we can just delete it.

Let’s look at some overlays. Overlays are all just scrambled in here as
well. A moving average is a popular one. We pull it up. It pulls up a 30.
All sorts of moving averages: 50 is a common one. 100 is a common one. 20
is a common one. All sorts of moving averages you can add. All this means
is it’s calculating the average over the last 30 periods. A couple
different types of moving averages. We can see that it just tracks the
price.

Another popular one — let’s get rid of that — is Bollinger Bands, if we
can find it. It creates a channel around the price, which provides some
insight into what the price is doing. As you can see in here, it’s moving
in the top part of this three-prong channel, so we would consider this an
uptrend. We can see in this part it’s traveling in the lower section, so we
would consider this a downtrend. These indicators basically help us confirm
what we can see via the price action.

On that note, let’s talk about the price action. We can see here the London
session is highlighted in yellow. I’ll tell you in a moment how you can get
some additional indicators that aren’t included in MetaTrader.

Let’s look at the price action here. The definition of a downtrend is just
overall lower swing highs, lower swing lows. We can see we start from a
high here and we make these progressive… you can see the highs continue
to drop, the lows continue to drop, so we’re making this overall progress
to the downside via these waves with lower lows and lower highs. This high
lower than that high lower than that high; this low lower than that low
lower than that low.

At this point, we’re still in a downtrend if we go right to the edge of
that chart. We’re still in a downtrend. If we think that downtrend is going
to continue, we’d be looking for short positions to take advantage of the
next down wave, continuing with this pattern here, but instead, we break to
the upside.

Now, we have an uptrend in place. The downtrend is no longer there, because
we now have a higher low than here and a higher high than here. This
progress continues, so we have a higher high, a higher low, another higher
low, a higher high, higher low, higher high, until this point here. We can
see the price drops below a former low.

First, we have this little pullback where the price doesn’t make a new
high, then we have this drop below a former low. We can see that we are
maybe, potentially moving into a downtrend here. If we think that downtrend
would continue, we’d be looking to look short trades, but if you look at
the overall, you may zoom out a bit and say, “Overall, we’re still making
progress higher. Yes, it took this little low, but we’re still above this
major low.”

Even with price action, there’s going to be a bit of subjectivity, and you
can still see we are making overall progress higher. This is where your
subjectivity will come in, your decision making. The better you get at
reading price action, the better you’re going to be at being able to
interpret which way this is going to go.

Remember, you’re not always going to be right. There are too many factors
to consider. All that matters is that you’re right more often than you’re
wrong or that, when you are right, you make on your winners than your
losers. We are going to be wrong at some of these turning points and that’s
okay, but by isolating the trends, we can help ourselves be in the most
likely position to profit.

By trading with the trend here, we’re looking for long signals to
participate in the next upwave. Here, still looking for longs. Here, we’re
in a questionable space. Here, we’re only looking for short positions.
Here, still looking for short positions, so I probably would have lost one
on this first move here, but then you transition and you start taking the
long positions.

Indicators can help in this regard. You’re looking at the overall price
action. You can see the price is down. Maybe an indicator gives you a sell
signal. That might help you get into a position during this downtrend, but
if you get a buy signal to enter a position, you may not want to take it,
simply because you can see that the overall trend is down. You mostly want
to be focusing on the downtrend and participating in that. We don’t want to
trade against the trend until it actually shows that it is reversed.

This is how we use the price action in combination with indicators, if we
choose to use them. As I mentioned, I just use price action. I haven’t
found really too much need for indicators, but you can use them. In this
case, once it shifts to an uptrend, you can use your indicator to look for
buy signals, and then you’d use those buy signals to participate in the
uptrend.

As I mentioned, I am using another indicator here, what we call a session
highlighter. This yellow section marks the London session. This section
here marks New York, so this is the overlap period between New York and
London. Once London closes, it’s just New York, and New York is just in
blue.

MetaTrader has a whole bunch of other indicators that you can add that
aren’t included in your default list of indicators. If you go along the
bottom here, you can see the code base, and if you just double click on
something in there, it will pop up the MetaTrader library, they call it.
Basically, people have added indicators that they’ve created, and then you
can download them, install them into MetaTrader, and then you can use them.
Some guys on here might charge for them. These aren’t tested, but you can
add them, try them out for yourself, and some of them are quite good.
Highly visual, as you can see some of them. The default list of indicators
that is in MetaTrader is not your sole resource. You can always find more.

That is how we look at price action in combination with our indicators and
our overlays. Go into your demo account. Do this where you’re highlighting
the higher highs, higher lows or lower lows, lower highs, whatever it is.
Maybe make a note to yourself, “Okay, this is a downtrend,” and then maybe
potential transition period. Here is what we call a transition period,
where we’ve moved from the downtrend into an uptrend. We’d mark this as we
are now in an uptrend, which means that we’re mostly looking to participate
in long positions or buying positions.

Here we have a bit of what we call a confusion area. We could potentially
just move sideways in a range here. We could move back lower. We could move
higher again. We’d mark this maybe as a little “X” or something like that.
Just mark the areas on your charts where there is no clear indication. Mark
uptrends, downtrends, and by going through this, you’ll be able to better
understand price action.

You’ll be able to better understand when you should be taking trades, when
you should be staying out, when to get in, when to get out. Also, if you do
decide to use an indicator, look at how it could confirm what you’re seeing
on the price action, how it could give you some signals to enter and exit.

Until next time, happy trading.

Comments are closed.