In commodity or forex trading, technical analysis is an essential part of building any trading strategy – including using various trading indicators.
Trading indicators are calculations on a price chart represented as lines that help you to analyze trends in the market.
While leading indicators predict future prices, trading indicators analyze the past and predict likely momentum.
Here are four useful trading indicators that every trader should use in 2020.
Heiken Ashi Candles
When paired with risk management tools, trading indicators can give you a clear insight into price movements. Heiken Ashi candlesticks resemble a typical Japanese candlestick, but several details differ from the traditional candlestick chart.
Every Heiken Ashi candlestick has an upper candlewick, a shadow (lower candlewick) and a body – much like the Japanese candlesticks.
However, a bar in the Heiken Ashi starts from the middle of the one before it and not where the previous one closed-a significant distinction.
Each candle has a high, low, open and close, and thus the Heiken Ashi formula has four segments.The opening level is the midpoint of the previous bar; the Close of each bar is the average of high, low, open and close.
- Open= (Open of previous bar+ Close of previous bar)/2
- Close = (Open + Close + High + Low)/4
- High = the Maximum Price Reached
- Low = Minimum Price Reached
The upper wick represents the high, and the lower represents the low while the open and close are represented by the body. When a price finishes higher than where it started, it suggests upward pressure on the price – a bearish signal.
When the close is lower than the open, downward pressure on the price is suggested, a bullish signal.
When there are alternating bearish and bullish candles, it isn’t very easy to predict the trend.
The Heiken Ashi isolates noisy price action, smoothing the chart. It leaves behind small consolidations and corrections, emphasizing on persistent trends.
If you’re aiming to catch persistent trends, then Heiken Ashi will be valuable.
Ichimoku Indicator
This is a technical indicator that uses averages over a period of time to show relevant information. When the price is above the cloud, the trend is upwards and downwards when the price is below the cloud. The price in the cloud suggests a transitioning or trendless state of play.
The Ichimoku Cloud has five lines. In two of the lines, there’s a cloud, and the difference between the lines is shaded in.
Formulas for Ichimoku Cloud
- Conversion Line (kenkan sen) = (9 Period High + 9 Period Low)/2
- Base Line (kijun sen) = (26 Period High + 26 Period Low)/2
- Leading Span A (senkou span A) = (Conversion Line + Base Line)/2
- Leading Span B (senkou span B) = (52 Period High + 52 Period Low)/2
- Lagging Span (chikou span) = Close spotted 26 period in the past
When the Leading span A is above Leading Span B, an uptrend is confirmed, and the colour of the space between the lines is green. When it is lower, a downtrend is confirmed, and the space colour between the lines is red.
Using the Ichimoku Cloud with other technical indicators helps traders maximize risk-adjusted returns. It can be paired with the Relative-Strength Index or even used in crossovers.
Money Flow Index (MFI)
Also known as volume-weighted RSI, Money Flow Index is an oscillator that measures how money flows into and out of security over a specified time.
It is calculated by creating a Money Ratio after accumulating the positive and the negative Money Flow values. You then normalize the money ratio into the MFI oscillator form.
Below 20 are the oversold levels while above 80 are the overbought levels, which are prone to change depending on the conditions in the market.
How to Calculate an MFI
- Typical Price= (High + Low + Close)/3
- Money Flow= Typical Price * Volume
- If a Typical Price is higher than the previous, it’s considered a Positive Money Flow, and if it’s lower than the previous, it’s a Negative Money Flow.
- Positive Money Flow= Sum of Positive Money over a specified period
- Negative Money Flow= Sum of Negative Money over a specified period
- Money Ratio= Positive Money Flow/ Negative Money Flow
- Money Flow Index = 100- {100/(1 + Money Flow Ratio)}
MFI is useful when there is a divergence. That is when the oscillator moves opposite to the price. This signifies a potential reversal in the current price.
CCI Indicator
Commodity Channel Index was developed by technical analyst David Lambert and initially published in Commodities magazine in 1980. It can, however, be used in any market – not just commodities.
It can be used to track indicators of buying and selling in the market. It also compares the prevailing price with the average price over a specified period.
Calculating CCI
CCI= (Typical Price- Simple Moving Average)/ (0.015 * Mean deviation)
Key Points
- CCI determines the difference between the current price and average price over a period of time.
- CCI above zero shows that the price is above the historical average, and that of below zero shows a price below the historical average.
- A downtrend may be indicated by a movement from positive or near zero to -100
- An uptrend may be indicated by movement from negative or near zero to +100
- Readings below -100 show the downtrend has been going on and the price is below the historic average
- Readings above +100 indicate the uptrend has been going on and the price is above the historic average price
- CCI can go higher or low for an indefinite period of time. Thus, by looking at CCI levels that were extreme, of every single asset, you can determine the overbought and oversold levels.
Conclusions
Trading indicators affect how you interpret trends – both in averages and positions and the opportunities you’ll have access to. According to Forbes, professional traders use more than one trading indicator to achieve the best results.
If you choose wisely, you’ll have built a solid foundation in speculation, but a poor choice will turn predators your way. The above indicators are relevant in different situations. They can be coupled with other tools such as RSI for better results.