This is the second part of the previous article Tools and Software for Forex Analysis. Here, we delve further into this topic to unravel more tools for technical analysis that are out there and which can make trading a lot more fun with a lot less drudgery.
TRUE TRENDLINE (TRUE TL)
Trend lines are a very important tool in forex technical analysis. There is virtually very little a trader can do in technical analysis without deploying trend lines. They are used to demarcate chart patterns, trace out areas of support and resistance (and hence useful in determining stops and price target areas), used in price channels, and also used in defining many trading strategies. The problem with trend lines is that they have to be traced correctly with the proper reference points, and they must touch at least two or three areas where the price has made highs or lows when being used to define support and resistance or when used to trace out chart patterns. So while they are very good tools, traders without much experience usually have problems when tracing them. It is either the wrong reference areas are used, or those without an eye for symmetry simply misapply them.
This is where the TRUE TL indicator comes to the rescue. This trendline indicator for Metatrader 4 is a tool that draws all trend lines automatically, using the correct reference areas and plotting it across the proper points. The TrueTL indicator works by counting the start points from the historical data of the actual time frame chart, and also the trend line’s end point, depending on the last pullback level that is visible on the chart. This gives the True TL indicator the ability to analyze the whole chart (including higher time frames). This puts the True TL indicator at the very top when it comes to choosing the best multi time frame trend line indicator.
Ok, you may be asking: why on earth are we introducing another indicator here, and in this case a trend line indicator? Why is it important to use trend lines? The importance lies in the fact that trend lines allow traders to control risk, which is one of the few parameters in a forex trade that is left totally in the hands of a trader. In order to show you how the True TL indicator can help you achieve this, we invite you to read the following explanation on how to use the True TL indicator in the forex market.
THE MOST IMPORTANT FORMATIONS DETECTED BY TRUE TL
The trend line is defined as a straight line that is used to connect two or more price tops or price bottoms. The trend line can then be used to define the direction of the trend, and this trend line can also serve as a support or resistance in the future. The more times that the price action touches a trend line, the more accurate the trend line will be and the more powerful the price action response will be.
The most important trend line definitions are:
a) Trend line break
b) Trend line break with pullback test
c) Trend line bounce
Trend lines can be used to effect many trade setups. In most trade scenarios, the trader will encounter just the break of a trend line, with some bit of trade filtering done to confirm the signal. Longer time frame trend lines however must be traded on the basis of pullback and testing of the broken trend line for the confirmation of the breakout, or they can be used to trade a trend line bounce.
However, trading with the trend line requires some common sense, and we shall now explain how to yse the True TL indicator to introduce some commonsense into the trend line trade technique.
HOW TO ACCURATELY USE THE TRUE TL INDICATOR
One of the few parameters that are absolutely under the control of the trader in forex trading is the ability to control the initial risk in a trade. Most newbie traders focus only on how to achieve some kind of holy grail system which produces “good” buy or sell trade signals. This is a wrong approach as a Win-only entry signal in the market doesn’t really exist. True profits only come from being able to pick scenarios where there is a larger amount of winning positions and a smaller amount of losing positions. So in the long term, the trading account’s balance can only grow with properly engineered and tested risk management technique that considers the trade entry signal. One of the ways to do this is by the proper use of trend lines, and this is how the True TL indicator works.
a) DETERMINE THE INITIAL STOP LOSS
I recently met an old friend with whom I started trading the forex markets, and he told me he was no longer in the game. When we analyzed the reasons for his losses, he confessed that he never used a stop loss for his trades! I was like..seriously? His view is a reflection of what is very obvious: most beginner traders trade positions without setting a Stop Loss (SL), believing that this gives a losing trade a chance to reverse and eventually come good. This is one major reason beginner traders receive margin calls on their trading accounts.
The real problem here is that many do not know how to use a Stop Loss. A Stop Loss is not meant to tbe set arbitrarily. There are rules guiding the positioning of a Stop Loss. A Stop Loss is also not supposed to be moved around and adjusted to accommodate more losses. Rather, a Stop Loss can be set on the basis of a trend line, and as the position becomes more profitable, it can be adjusted in the direction of the winning position to lock in profits. The True TL indicator works by setting a trend line on the price that corresponds to a previous price peak/valley, Support/Resistance levels, or pivot points. The trader can then use this information to set a dynamically determined Stop Loss.
b) DETERMINE THE POSSIBLE TARGET PRICE
The True TL tool then scans the charts and sets a trend line on the opposite direction to the stop loss, using the following parameters: a Support/Resistance level, pivot point, or previous price peak/valley. This new trend line now serves as the basis for setting the Take Profit (TP).
c) DETERMINE THE RISK/REWARD RATIO (RR RATIO)
Having determined the Stop Loss and Take Profit areas, the next thing the True TL does is to determine the risk-reward ratio. The risk is defined as the distance in pips between the trade entry price and the price level at the Stop Loss. The reward is defined as the distance in pips between the trade entry price and the price at the Take Profit level. When these have been determined, the risk/reward ratio can be calculated BEFORE the trade is made. If for instance, the Stop Loss is 50 pips away from entry, and the Take Profit distance from entry price is 100, then the Risk-Reward ratio is 1:2. As much as possible, reward must always outweigh the risk or in the worst possible scenario, be at par with risk. By telling the trader what the risk-reward ratio is before a trade, the True TL indicator can stop a trader from entering a position which is far too risky for the number of pips being targeted as profit.
d) CALCULATING THE LOT SIZE OF THE TRADE POSITION
The True TL indicator is a useful aid in helping traders use a percentage-based calculation to determine what lot size should be used in a trade.
FOREX RISK A INDICATOR
Forex Risk A indicator is an order management indicator which is used to manage orders and carry out money management on trades. It is well recognized that the only way to last long in the market and avoid the effects of a devastating losses on the trading account is to apply proper money management and only choose trades where the risk-reward ratio is high. Every trade risks your hard earned money, and you must know how to manage this risk. It all used to be a tortuous, manual process, but with Forex Risk A, an automated and convenient tool for this has been developed.
HOW THE FOREX RISK A INDICATOR WORKS
How does the Forex Risk A add-on function?
The Forex Risk A indicator takes a predetermined risk for each order of the capital accepted. It eases the burden of risk calculation on the trader and leaves the trader time to focus on other trade requirements. The Forex Risk A comes in the form of an add-on to the broker’s MT4 platform, and can be used on all forex pairs and also on the other listed assets such as spot metals, Index CFDs and a few stocks. In other words, no matter the listed asset on the broker’s platform, the Forex Risk A add-on can be used on the chart of that asset.
The basic package consists of the following:
1. The Forex Risk A indicator, which allows the trader to visually set a stop loss on the chart. According to the positioning of the stop loss, Forex Risk A displays the stop loss distance, the lot size you can open with the pre-set risk, how much capital is put at risk in a trade, and the spread associated with the currency pair.
2. Script4Risk MT4 script with which the trader can get into a trade position based on the levels and values by clicking a mouse. The script uses the market price of the asset and the stop function to automatically recognize if the trader intends to place a Buy or Sell Order on the asset. The position size is set according to the level of the risk.
3. Script4RiskOrderModify script which is used to modify the Take Profit targets and the Stop Loss of the initial position. This is a core aspect of trade management which seeks to adjust profit targets and stops in the direction of a winning trade so as to lock in profits and prevent the trade from giving up pips to the market.
4. Script4RiskPending script which allows traders to set pending orders after the RiskA pending mode is switched on. Based on the pending levels, the market price and the Stop Loss positions, the script automatically recognizes when the trader intends to open pending orders: Sell Limit, Buy Limit, Sell Stop or Buy Stop orders. Again, the size of the position is set according to the risk level previously specified for the trade.
If you are familiar with MQL, you can actually modify the parameters on the Forex Risk A indicator, either in your MT4 platform or on the MQL Developers Portal.
Here, we will talk about three divergence indicators: MACD, Commodity Channel Index and Relative Strength Index (RSI). Their signal lines behave alike and this makes them suitable for trading the divergence. The basis of the divergence trade is simple: pick out areas where the price action is moving in a different direction from the indicator, and set a trade position in the direction of the indicator’s movement as the price action is expected to eventually correct itself to follow the indicator.
MACD Divergence Indicator
Anyone who has tried to manually spot the MACD divergence will easily attest to the fact that it can be a difficult business. Yes it is profitable, but you will have to sweat for the profit. The MACD Divergence indicator takes away the sweat factor by automatically drawing divergence lines on the chart and the MACD indicator. It does this without the attendant problem of accuracy detecting the tops/bottoms on the MACD indicator and the price chart. It takes the last 300 bars into consideration, and uses a basic candlestick pattern and divergence slope filtering mechanisms. It works on several time frames and can give sound and visual alerts.
The arrow is a non-repainting arrow which appears on the close of the trigger candle. Its appearance however occurs prior to entry. Please note that the trade signal must still be filtered by applying another entry parameter.
Sample alerts given will look like this:
• EURJPY on M30 – bearish regular divergence (Object: Divergence | ID: Main)
• AUDCAD on M15 – bearish hidden divergence (Object: Divergence| ID: Main)
The indicator comes with protection so that only the premium copy will work best on your platform.
CCI Divergence Indicator
This indicator is similar in characteristics to the MACD and RSI Divergence indicators, with the only difference being that the Commodity Channel Index is the main indicator on which this tool is based. It also produces visual and sound alerts just like its counterparts. Filtering parameters such as trend line breaks must be used before trade entries.
What is the MTF script? This is a Multi TimeFrame script which allows the trader to watch multiple time frames and their indicator values without having to keep switching from one time frame to another and back again. Anyone who has had to keep switching in between timeframes can attest to the fact that if you do that long enough, you can actually start getting kind of dizzy. For people who can’t keep up with the visual torture of switching in between time frames, the MTF script is a tool that can solve their problem. For instance, if the trader sets the time frame of the indicator to that of a four hour chart (H4), and sets the timeframe of the main chart to H1, the trader can then see the H4 indicator’s value on H1.
The indicator shows the actual data of a time frame a lower timeframe other than the actual chart’s timeframe is specified.
Features of the MTF Script
The following settings of the MTF Script can be adjusted to suit the requirements of the trader. These settings can be adjusted by pressing the F4 button on the computer to open the MQL interface.
• Period: You can adjust the time period of indicator.
• Price: You can set the price on which the indicator performs its calculation. (0=close; 1=open; 2=high; 3=low; 4=median; 5=typical; 6=weighed)
• MA Method: This allows the trader to choose what type of moving average the script will work with. (0=simple; 1= exponential; 2=smoothed; 3=linear weighted)
• Color: For better visualization, the trader can adjust the color of the lines.
• Width: This is used to specify how wide the indicator’s lines should be; again used for better visualization of the indicator.
• Style: This is used to specify the style of lines (0=solid, 1=dashed, 2=dotted, 3=dashed+dotted, 4=dashed+double dotted). Works only if the Width=0.
• Histogram Mode: true = drawing in histogram mode, false = drawing in line mode.
• Color Mode: You can set between 0 and 2. The levels are adjustable with the High_Level, Middle_Level, Low_Level settings.
HOW TO GET THE INDICATORS
These indicators are all available at a cost of $160 online. Payment of this fee comes with lifetime access. There are however no trial periods, so if you buy these indicators, you are essentially doing that at your own risk. Forex4you has not tested these indicators to thoroughly assess their performance. What we have simply done here is to alert you to the presence of these indicators. If they perform, that will be good. If they do not, you have to ditch them and move on.
The author’s views are entirely his or her own.