We all want to find better ways to predict market direction correctly, because it’s one of the necessities to make profitable trades. There are a lot of different ways to do it, including using a market direction indicator on MT4.
The MT4 platform has 30 technical indicators built in, categorized as either trend following or oscillating indicators.
In this article, I will be listing 5 market direction indicator that you can use and how to use them when trading.
Whether you’re a beginner or an intermediate trader, these indicators might be useful to you. They might already be familiar and you may even be using them already. But if not, they’re worth learning more about.
Let’s get started.
What is a market direction indicator?
Markets go up and down, right? That’s not exactly a novel concept, practically everyone knows that. But that leads us to an age old question that most people want to know more about. How can you tell if the market is going up or down?
What is perhaps the most important aspect of market analysis is the correct interpretation of market direction. It is also likely to be a trader’s area of main concern as it directly determines whether they will end up on the winning or losing side of a trade.
This is where some kind of market direction indicator can help. Market direction indicators might provide you with an idea about where the market might be moving next.
With that said, there are no market direction indicators (on MT4 or MT5) that are 100% accurate in predicting market direction all the time. But there are 5 market direction indicators on MT4 that might help you with that. Furthermore, these market direction indicators might also help you to stay on the right side of the market while price is trending.
So read on to find out what these market direction indicator are and if you should consider adding them to your price charts.
How to set up the market direction indicators on the MT4 trading platform
To make sure you have the right understanding of what a market direction indicator can do, let’s take a moment and explain some of them.
On the MT4, navigate to and click on the insert menu option, found at the top of the trading platform. Then go to indicators > trend to see the options for the trend indicators available.
To start with, let me provide a brief explanation on what a trend is in trading. Then we will move on to some of these trend indicators and how they can be used as market direction indicators.
A trend is the general direction that a market or an assets price has been going in. Trends can be long term, short term, move upward or downward and even go sideways or remain neutral. Most trends tend to be long-term in nature, although there are many smaller short term trends within them. Trends exist within trends.
You may have heard this old adage; the trend is your friend!
Forex traders are naturally inclined to form a bias about the prevailing price trend and then trade in the direction of it. Trend indicators are usually displayed on the price chart.
Here are 5 of the most popular trend indicators traders’ use and how they use them as market direction indicators on MT4.
The first one is the moving average.
Moving averages as a market direction indicator
A moving average (MA) is a market direction indicator used to help determine trend direction and its strength by smoothing out price fluctuations. They average price out over a specified number of intervals and plot that on the chart. There are two main types of moving averages: the simple moving average (SMA) and the exponential moving average (EMA).
In order to see how moving averages smooth out price and help with determining the market direction, let’s look at an example:
Whenever the market is trending up, the moving average (orange line) also slopes and points upwards. When the market is trending down, the moving average also slopes and points downwards.
Furthermore, when price is above the average price the trend could be turning up and when price is below the moving average, the trend could be turning down. It all needs to be viewed within the right context.
From the chart above, it is pretty easy to see the long term trend is down because the moving average is making a series of lower highs and lower lows.
However, in the immediate short term, price is currently above it which may indicate that the next impulsive wave down isn’t likely to start yet. There may even be a change in market direction, but the moving average should start creating higher highs and higher lows before that is likely to happen.
Bollinger bands for direction and volatility
The next market direction indicator on MT4 and on this list is the Bollinger bands indicator. It is similar to the moving average but it also has upper and lower bands in parallel to it. These three components of the indicator can be used to measure the direction of a price trend, the strength or weakness of a trend and help determine potential reversals.
This is what it looks like on a price chart.
The middle orange line is a simple moving average. The upper band is 2 standard deviations away from the simple moving average. And the lower band is also 2 standard deviations away from it.
This means that in normal market conditions, 95% of all price action will trade within these two outer bands. While setting the indicator to 3 standard deviations would mean that 99% of all price action would be expected to remain inside these bands.
The spacing between the bands varies, depending on price volatility. The bands expand as volatility increases and contract, or get closer together as volatility decreases.
As well as using it like the moving average indicator, a buy signal may occur when price exceeds the lower outer band. A sell signal may occur when price reaches and exceeds the outside upper band. Like all other technical market direction indicator, this isn’t always accurate. But what seems to happen often is price reverts back to the moving average, whenever price moves outside of the bands.
Ichimoku Kinko Hyo for a more dynamic view of market direction
The Ichimoku Kinko Hyo indicator is a technical indicator on MT4 (or MT5) that compares two moving averages of an asset over different timeframes. The name translated to English is “one glance equilibrium chart” or “instant look at equilibrium chart”. The indicator provides traders with another way to see the potential market direction.
This is what it looks like on a price chart.
It may seem quite confusing but I will explain what all those lines mean.
- Tenkan Sen (red line)
- Kijun Sen (blue line)
- Chikou Span (green line)
- Up Kumo (purple shaded area)
- Down Kumo (orange shaded area)
The Ichimoku Kinko Hyo consists of three lines and a cloud (kumo). The kumo’s are used to determine market direction or trend and indicate the markets conditions, as either bullish or bearish.
The three lines; Tenkan Sen, Kijun Sen and Chikou Span, represent price averages of different timeframes and show price momentum for short, medium and longer term trends.
When price is above all of these the market is more bullish. While, when price is below all of these, the market is more bearish. There are varying degrees of bullishness and bearishness in between, depending on where price is in relation to all these lines and the cloud.
This one definitely requires a bit of practice and observation to get how it works. But it provides much more information about the potential market direction than the previous two indicators.
The fourth indicator on this list is the Parabolic SAR, which is also used as a market direction indicator on MT4 by many traders. It shows the price trend and its strength on the chart with small dots called parabolic SAR (stop and reverse).
These small “dots” are placed either above or below the price. When the dots appear below the price, it is an indication that bullish momentum is building and prices may continue to rise. Conversely, when the dots appear above the price, it is an indication that bearish momentum is building and prices may continue to fall.
This is what it looks like.
The name of the indicator suggests that it is parabolic in nature and works in the same way as a parabola. When the distance between the price and the dots is closer, the indicator may be showing a potential change in trend. When the distance is wider, the indicator may be showing you that there is still more momentum left in the price trend.
Further to that, this market direction indicator also shows you when you might want to “stop and reverse” your bias.
Average directional movement index
The final market direction indicator that can be found on the MT4 trading platform is the average directional movement index. It is derived from the difference between the high and low prices for each time interval.
It is the only indicator on this list that is attached to the price chart, in its own window instead be being overlaid on it. The Average directional movement index is made up of three lines.
The +DI (blue dashed) line shows the strength of the buyers or bulls in the market. This means that it shows how much upward pressure there currently is on price. When it turns down and crosses below the -DI, it signals a possible end of an uptrend.
The -DI (red dashed) line shows the strength of the sellers or bears in the market. This means that it shows how much downward pressure there currently is on prices. When it turns down and crosses below the +DI, it signals a possible end of a downtrend.
The ADX (black) line itself, shows the strength of the current trend, without regards to whether it is a bullish or bearish price trend.
As you can see from the recent price action in the chart above, the strength of the recent uptrend is decreasing, while the direction of the trend is changing.
Conclusion of the market direction indicators on MT4
Many of you may be able to relate to this; when starting out as a new trader, you are exposed to all sorts of information and trading methods. This will invariably include technical indicators and the idea that they can help determine market direction.
When it comes to trading forex, these indicators are supposed to help you identify trading signals and become more systematic in executing them. However, the more technical indicators you add to your charts, the more confusing it can become. Furthermore, it is important to note that these technical Indicators are derived from price data. They are lagging and will be unlikely to give an early warning about an impending move in the market.
No technical indicator works 100% of the time, they will produce signals that fail and you can’t rely on just one. All indicators should be used in combination with other indicators to improve the probability of success.
With that being said, the goal of trading is to keep things as simple as possible so that you can quickly and clearly identify trading opportunities. You might want to consider using a market direction indicator or trend indicator in combination with an oscillating indicator.
If using technical indicators to determine market direction helps you, then more power to you. But there are pros and cons to using these, so it is important for to understand what their strengths and weaknesses are, and how to use these tools.
You should observe these indicators, study them further and test them for yourself before using them to trade with real money.
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