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An indicator is a calculation applied to the price feed or to the volume, and the result is plotted on the chart as a line, a histogram, or a band. The indicator condenses a lot of price action into a single value, and the trader uses the value to confirm the trade. MetaTrader comes with dozens of built-in indicators, and the platform supports custom indicators in MQL4 and MQL5.
What an indicator is
An indicator is a calculation applied to the price feed or to the volume, and the indicator is plotted on the chart as a line, a histogram, or a band. The indicator condenses the price action into a single value, and the trader uses the value to make a trading decision. MetaTrader comes with dozens of built-in indicators, and the platform supports custom indicators in MQL4 and MQL5.
Indicators fall into three main categories: trend indicators, which show the direction of the trend, momentum indicators, which show the speed of the price change, and volume indicators, which show the participation behind the price move. The trader usually combines one indicator from each category, and the trader uses the combination to confirm the trade.
Trend indicators
The first trend indicator is the moving average, which smooths the price action and shows the direction. The simple moving average uses the average of the last N closes, and the exponential moving average gives more weight to the recent prices. The trader uses two moving averages of different periods, and a cross of the two averages is a signal.
The second trend indicator is the MACD, which is the difference between two exponential moving averages plotted with a signal line. The MACD shows the momentum of the trend, and a cross of the MACD and the signal line is a signal. The MACD works on trending stocks, and the MACD produces false signals in range-bound markets.
The third trend indicator is the Ichimoku Kinko Hyo, which combines five lines to show the trend, the momentum, and the support and resistance. The Ichimoku works on liquid stocks and major indices, and the Ichimoku is harder to read on small-cap stocks.
Momentum indicators
The first momentum indicator is the Relative Strength Index (RSI), which compares the average gain to the average loss over a lookback period. The RSI oscillates between 0 and 100, and the values above 70 are overbought, and the values below 30 are oversold. The trader uses the RSI to time the entry in the direction of the trend.
The second momentum indicator is the Stochastic Oscillator, which compares the close to the range over a lookback period. The Stochastic has two lines, the %K and the %D, and a cross of the two lines in the overbought or oversold zone is a signal. The Stochastic works on range-bound stocks, and the Stochastic produces false signals in strong trends.
The third momentum indicator is the Average Directional Index (ADX), which measures the strength of the trend regardless of the direction. The ADX does not show the direction, and the ADX is used with a trend indicator to confirm the strength. The values above 25 indicate a strong trend, and the values below 20 indicate a weak trend or a range.
Volume indicators
The first volume indicator is the On Balance Volume (OBV), which adds the volume on up days and subtracts the volume on down days. The OBV shows the cumulative flow, and a divergence between the OBV and the price is a signal. The OBV works on stocks with reliable volume data, and the OBV is less reliable on stock CFDs.
The second volume indicator is the Accumulation/Distribution Line, which uses the close relative to the range to weight the volume. The indicator shows the buying pressure and the selling pressure, and a divergence is a signal. The indicator works on stocks with reliable volume data.
The third volume indicator is the Volume Profile, which shows the volume traded at each price level. The Volume Profile is not built into MetaTrader, and the trader needs a custom indicator or a paid add-on. The Volume Profile is useful for identifying support and resistance levels.
Combining indicators
A common combination is a trend indicator and a momentum indicator. The trend indicator shows the direction, and the momentum indicator shows the timing. A long entry happens when the trend is up and the momentum is oversold, and a short entry happens when the trend is down and the momentum is overbought.
The trader should avoid using multiple indicators of the same category, because the indicators give the same signal. The trader should also avoid using too many indicators, because the chart becomes cluttered, and the trader is overwhelmed by the signals.
Common questions about indicators
Which indicator is the most accurate? No indicator is the most accurate, because every indicator is a calculation on the historical data, and the historical data does not predict the future. The accuracy depends on the market, the timeframe, and the trader's discipline.
Can I write my own indicator? Yes, in MQL4 or MQL5. The MQL languages are well documented, and the languages have access to the price feed, the indicator buffers, and the chart objects. The trader can start with a simple indicator like a moving average, and the trader can add features over time.
How many indicators should I use? Most traders use two to three indicators, and the indicators come from different categories. More indicators produce more signals, and more signals mean more trades, and more trades mean more commissions and more risk.
Related resources
Where to start
If you are evaluating indicators, the most useful first step is to choose one trend indicator and one momentum indicator, and to apply the indicators to a chart of a stock you follow. Our broker comparison lists the MetaTrader brokers and the available products, which together tell you what the platform looks like before you build your first indicator-based strategy.