Technical Analysis Overlays and Indicators

Overlays, Indicators, and Oscillators

Technical analysis is a set of tools and techniques used to identify market trends and to determine whether the market is trading at overbought or oversold levels. Below are the basic categories and tools of technical analysis that traders use worldwide:

• Overlays
• Price-based indicators
• Volume-based indicators
• Market and breadth indicators

Today, hundreds of different indicators are available. Most traders use technical analysis within MetaTrader 4. Other trading platforms, such as NinjaTrader, offer a wide variety of indicators along with advanced charting capabilities. Even Microsoft Excel can serve as a basic framework for implementing technical analysis.

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Important Technical Analysis Indicators

Below is a list of many popular technical analysis indicators and overlays. These tools are used by various types of traders, including Forex traders, stock traders, commodity traders, and more.

■ Overlays

Overlays are incorporated directly within price charts and include:

• Support (↓_) and Resistance (↑¯) Levels

• Trend Lines (/ or )

• Channels (Two parallel trend lines)

• Pivot Points (The average of high, low, and close prices for a given period)

• Bollinger Bands (A range between two bands derived from the price’s standard deviation)

• Price Channels (Channels formed by the highest highs and lowest lows)

• Moving Averages (Popular simple or exponential moving averages)

• Moving Average Envelopes (Two simple moving averages forming a price channel)

• Parabolic SAR (A tool based on stop-and-reverse price levels)

• VWAP (Volume-Weighted Average Price) (The daily price calculated by dividing the total dollar value of trades by the total trading volume)

• Keltner Channels (Volatility channels based on the ATR indicator, which measures volatility)

• ZigZag (An overlay highlighting significant price movements based on a pre-selected filter)

■ Indicators

Indicators are displayed above or below price charts and include the following:

Price-based Indicators

• Williams %R
  A popular momentum indicator measuring the stochastic oscillator to identify overbought and oversold levels.

• MACD (Moving Average Convergence/Divergence)
  A widely used momentum oscillator based on the difference between two exponential moving averages.

• MACD Histogram
  Measures the difference between the MACD line and the signal line.

• Bollinger Bands %B
  Highlights the relationship between price movement and the Bollinger Bands.

• Relative Strength Index (RSI)
  Very popular in Forex trading, RSI indicates overbought and oversold conditions.

• Standard Deviation
  Measures market volatility.

• Stochastic Oscillator
  Compares the current price performance of an asset to its past price movements.

• Average Directional Index (ADX)
  Differentiates between trending and oscillating price movements.

• Average True Range (ATR)
  Measures market volatility.

• Bollinger BandWidth
  Measures the distance between the upper and lower Bollinger Bands.

• Commodity Channel Index (CCI)
  Measures the variation of the current price from its average price.

• Correlation Coefficient
  Shows the historical correlation between the prices of two financial assets.

• Detrended Price Oscillator (DPO)
  Uses moving averages to identify market cycles.

• Rate of Change (ROC)
  Indicates the speed of price changes in an asset.

• StochRSI
  Combines RSI and stochastic oscillator metrics.

• TRIX Moving Average
  A triple exponential moving average.

■ Oscillators

Oscillators aim to identify new trends and reversals. The most popular oscillators include MACD, RSI, Williams %R, ADX, CCI, Stochastics, and Relative Momentum Index (RMI).

■ Volume-based Indicators

Some common volume-based indicators are:

• Volatility Indices
  Measure implied volatility.

• Accumulation/Distribution Index
  Tracks cumulative inflows and outflows of money.

• Money Flow
  Measures money inflows and outflows.

• Chaikin Money Flow
  Another tool measuring money inflows and outflows.

• Accumulation Distribution Line
  Combines price and volume data to highlight money inflows and outflows.

• Money Flow Index (MFI)
  Similar to RSI, it tracks shifts in buying and selling pressure.

• On Balance Volume (OBV)
  Uses price and volume to indicate inflows and outflows.

■ Market & Breadth Indicators

These indicators use statistics derived from the broad market:

• Put/Call Ratio
  A popular sentiment indicator calculated by dividing put options volume by call options volume.

• Net New Highs
  Calculates the difference between new highs and new lows.

• High-Low Index
  Shows new highs as a percentage of the combined total of new highs and new lows.

• Arms Index or Traders Index (TRIN)
  A sentiment indicator comparing advancing and declining trading volumes.

• Advance-Decline Line and Volume
  Two cumulative breadth indicators.

• Advance-Decline Line
  Tracks changes in the advance/decline index over time.

• McClellan Oscillator
  An oscillator similar to MACD.

• McClellan Summation Index
  A cumulative indicator derived from the McClellan Oscillator.

Technical Analysis Before the Age of PCs

Before the advent of personal computers, traders used exceptional manual skills to draw technical analysis charts by hand. Although this was challenging and less precise, these traders had the advantage of early access to market information, enabling them to identify new trends and supply-demand levels. This provided a clear competitive edge, and such advantages can create profit opportunities regardless of the industry or era.

Image: The personal soybean chart of the famous investor William D. Gann (1948)

Creating Customized Trading Systems

Several applications can help traders transform their trading ideas into fully automated systems. One such tool is EA Builder, which can also create simple indicators and is 100% free. No programming skills are required — even beginners can create complex trading systems. You can trade any financial asset (Forex, Equities, Commodities) and use these systems on three trading platforms: MT4, MT5, and TradeStation.

Custom Trading Systems and EAs
EA Builder allows you to add technical analysis indicators with multiple functions to your custom systems.

• Platforms: MetaTrader 4, MetaTrader 5, TradeStation

• License: Unlimited Real/Demo Accounts

EA Builder offers a user-friendly interface with graphical functions and helpful pop-up windows. There are also 15 video tutorials to make the process even easier. The platform includes a full set of functions, such as stop-loss calculation and advanced money management tools. EA Builder is free for creating indicators.

» EA Builder website | » Creating Learn more about AA Builder

Final Thoughts – Do It Your Way and Avoid Following the Crowd

Technical analysis tools are valuable, but whatever tools you choose, you should strive to differentiate yourself from the majority of traders. It’s often better to avoid using the exact tools and settings that everyone else uses. Instead, build your own system or approach. If you cannot develop an efficient system on your own, consider outsourcing — for example, by using a reliable trading signals service.

Here’s why:

Statistics from the trading industry show that more traders lose money than gain it. In other words, the number of losers exceeds the number of winners. This happens because transactional costs push the overall result toward losses. Assuming equal positive and negative returns, the net sum would be negative, equal to the aggregate transactional costs in the market. If you do exactly what everyone else is doing, you will inevitably join the majority of traders who lose money.

Key Tip: “When trading intraday, be a contrarian. Think like the top 5% of traders — not like the other 95%.”

◙ Technical Analysis Tools –Full Overlay and Indicator List

G.P. for FxPros.net (c)