How to use mathematical methods? What are types of indicators? During this course we will learn how to use nine main indicators.
Technical analysis.
Part 3. Mathematical methods
Lesson 1.
Mathematical methods
of technical analysis
Today we will start to discuss the most complicated, but the most interesting part of technical analysis: mathematical methods. Despite the intimidating term «mathematical methods», we won't study higher mathematics and deal with cumbersome calculations. The advantage of these methods that cumbersome calculations are already made and methods are automatized. The novice trader just need to understand, how to analyze these indicators and use them in trade.
Video tutorial:
How to use mathematical methods of technical analysis
The flow of exchange prices is a certain sequence of numbers, and therefore, like any series of numbers, it could be calculated. Various methods of calculations allow traders to make fairly accurate forecasts of the price behavior in the future. Mathematical methods of technical analysis provide traders opportunity more accurately determine the patterns of price behavior, it filters statistical noise (or «white noise»), which is price fluctuations that do not have any significant effect on the price trend, but can confuse trader.
The result of the application of mathematical functions are technical indicators, that are placed on the price chart and allow traders to identify trading signals — the most optimal moments where trader should trade. We will study it in details during our course.
Indicators are based on the theory of chances and mathematical statistics. All basic methods of mathematical analysis have been already algorithmized and included in the trade programs. Therefore, such mathematical indicators are automatically calculated in most trading programs. In particular, in the trading terminal MetaTrader the most popular indicators are built-in by default. Trader just need to choose indicator which suits current market situation. Also, every trader, who understands mathematical apparatus and have sufficient experience in trading, can create indicators for himself.
Indicators types
Modern methods of technical analysis have a huge number of indicators, in general they could be divided into two types: trend-following indicators and lagging indicators.
Trend-following indicators precede price movements and try to predict the future, base on different types of moving averages. Lagging indicators follow price movements and act as a confirmation tool, mostly it is oscillators. We will study what it is and how to use it in our next lessons.
In our course we will not separate trend indicators and oscillators. The application of mathematical methods for one and the other often intersects, so we will consider them in the order that simplifies the understanding of these analytical tools. We will begin with the simplest ways to find trading signals — building simple average lines — and gradually move on to complex indicators, which are already became entire trading systems.
During this course we will learn how to use 9 indicators:
― Moving Average (MA);
― Moving average Convergence/Divergence (МACD);
― Relative Strength Index (RSI);
― Stochastic Oscillators (Stochastic);
― Parabolic SAR;
― Fibonacci Levels;
― Bollinger Bands;
― Ichimoku Kinko Hyo; Commodity Channel Index (CCI).
Indicators in the trading platform MetaTrader 4
The main indicators are built-in by default in the most trading platforms.
All indicators are grouped and by default placed in the menu bar in MetaTrader 4. There is a ribbon «Indicators» in the Navigation.
Indicators are divided into two groups, as we have mentioned before:
― trend (MA, Parabolic SAR, Ichimoku Kinko, Bollinger Bands);
― oscillators (MACD, RSI, CCI, Stochastic).
Fibonacci Level is in the main menu, because it can be used in different configurations, — see the lower left corner.
Each tool of mathematical methods has its own mathematical apparatus and requires configuration of certain settings. From the next lesson we will start to study the indicators and their key elements, learn to set parameters and how to analyze the market with their help.
The first indicator, that we will study, will be «Moving Average».
