What is a Trading Plan and why is it important?
Before traders can start their trading activities, it is important to have a sound trading plan in place before developing and implementing trading strategies.
A trading plan is a tool which traders use when making decisions pertaining to trading activities and it helps traders in deciding what to trade, when it is the right time or opportunity to trade and how much they should trade.
It is a personal plan and each trader will have a different plan that caters to their own individual needs. Although traders can use the plan of another trader, it is imperative that they formulate their own.
Each trader has a different risk tolerance and different available capital, so when drawing up a trading plan, traders can use the following points as a guideline to draw up their plan:
- It should clearly indicate the trader’s motivation for trading.
- It should indicate the time the trader is willing to commit towards trading activities.
- The trader’s goals should be clear and concise.
- The trader should indicate their attitude and tolerance to risk.
- The trader needs to evaluate and state the amount of capital that they have available for trading – both trading and non-trading costs, including possible losses
- Personal risk management rules should be outlined.
- The trader needs to decide on markets in which they wish to trade.
- The trader needs to outline their trading strategies.
- The trader needs to ensure that there are steps for recordkeeping – such as a trading journal.
A trading plan is not a trading strategy, it is a set of guidelines and rules that the trader puts in place and follows when they are trading as opposed to having a strategy that determines when they enter and exit trades.
Having a sound trading plan in place helps traders make logical decisions and it also defines the parameters of a trader’s ideal trade, in addition, a trading plan also includes the following benefits:
- It allows for easier trading because the trader has already planned upfront and they can follow the rules along with pre-set parameters.
- Decisions are objective-based and thus ensures that emotions are not involved in the decision-making process.
- It provides traders with improved trading discipline and through that the ability to identify why certain trades may work and others not.
- It provides traders with ample room for improvement through recordkeeping which allows traders to learn from mistakes and improve their judgement when trading.
What is a Technical Analysis?
A technical analysis enables traders to make predictions pertaining to future price movements on financial instruments by using charts in addition to technical indicators.
Furthermore, apart from charts and technical indicators, a technical analysis also comprises of volumes, patterns, trend lines and moving averages – all through which the trader will be able to forecast the probabilities of movements in future prices.
Technical analysis is different from fundamental analysis, which is equally important, in that it scrutinizes the ways in which supply, and demand will affect the changes which may occur in price, volume and volatility.
Fundamental analysis attempts to evaluate the value of a financial instrument based on business results which include sales and earnings. This is based on historical price patterns in addition to stock trends which can be sourced from market news.
The basic principle of technical analysis is the belief that previous trading activity in addition to price changes of a certain financial instrument may be an indicator proven to be quite valuable in predicting the future price movements of that financial instrument.
Although there are a lot of traders who either solely use technical analysis, or fundamental analysis, there is a vast majority who use both simultaneously on which to base trading decisions.
Often technical analysis is done by using technical indicators in addition to relying on other resources and forms of research and this is where technical analysis meets fundamental analysis halfway.
What are Technical Indicators and how are they used?
Technical indicators are complex mathematical calculations that are based on the following elements or components of a financial instrument:
- Price
- Volume
- Open interest of a financial instrument or contract
Technical indicators are used by traders specifically when conducting a technical analysis to enable them to more accurately attempt to predict future price movements of financial instruments.
Technical indicators are applied to charts where they can be viewed as representing a certain type of data depending on the technical indicator that the trader wishes to use and the information that the trader would like to obtain from its use.
Traders view historical asset price data to see key indicators that will guide them towards decision making on how, when and where to either enter trades or exit them while increasing the chance of profitability and minimizing the chance of losses.
All trading activity will have statistical trends pertaining to price movement along with volume and it is imperative for traders to identify these patterns of movement along with other factors to determine the strength or weakness of a financial instrument.
Technical indicators can be divided into two basic types, namely:
- Overlays, and
- Oscillators
Overlays
These technical indicators make use of a scale and are plotted on a stock chart over the very top of prices. An example of an overlay indicator is Bollinger Bands.
Oscillators
Are indicators that oscillate (as the name suggests) between a local minimum and maximum and which are plotted either above or below a price chart. Examples of Oscillators include MACD, RSI or the stochastic oscillator.
MetaTrader 5 Technical Indicators and how to use them
When it comes to technical indicators, traders have a wide variety to choose from depending on which work best for them, the only way to determine this, would be to make use of demo accounts, trying different indicators and testing the strategy repeatedly.
Technical indicators can also be combined in trading strategies with a more subjective form of technical analysis to allow traders to look at chart patterns which in turn allows them to come up with certain trade ideas from what they might identify from these patterns.
The very essence of conducting a technical analysis is that traders are able to study charts consisting of financial instruments by using technical indicators and MetaTrader 5 provides traders with an ample amount to do so.
MetaTrader 5 comes standard with 38 technical indicators, 44 analytical objects and 21 timeframes to provide traders with a comprehensive way in which to conduct technical analysis.
MetaTrader also offers traders the opportunity to download (or purchase) more tools either from the Code Base, the Market or by using the Freelance Service to obtain more tools from independent developers.
In addition, traders can also use the MQL5 programming language to develop their own tools based on the individual needs that they may have in addition to providing a strategy tester through which traders can run automated trading strategies.
MetaTrader 5’s indicators can be separated into the following:
- Trend indicators
- Oscillators
- Volumes, and
- Bill Williams’ indicators
Trend Indicators
These indicators can be used to detect trends that present themselves in financial markets and they point to the price movement direction. Some of the trend indicators that traders can use when making use of MetaTrader 5 include, but is not limited to:
- Adaptive Moving Average – can be used to construct a moving average which has a low sensitivity with regards to price series noises in addition to being characterized by the minimal lag present during trend detection.
- Average Directional Movement Index – helps the trader determine whether there is a price trend present.
- Bollinger Bands – can be drawn on the chart along with being added to the indicator chart and the interpretation is based on the price which tends to remain between both the top and bottom of the bands.
- Parabolic SAR – was initially developed with the purpose of analysing trending markets, moving at a high acceleration and changing its position in terms of the price.
Oscillators
These indicators show the price deviation from its average value and can aid traders in predicting when a correction is approaching or in determining the direction of the phase in which the price will oscillate.
MetaTrader 5’s oscillator indicators include, but is not limited to, the following:
- Bears Power – usually used in combination with a trend indicator such as moving average, the signal to buy comes when the trend indicator is up-directed with the bears power index below zero but with it growing.
- Bulls Power – this indicator is also used in conjunction with trend indicators and should the trend be down directed with the bulls power index above zero and it is falling, the trader is signalled to sell.
- MACD – indicates the correlation that exists between the two moving averages of a price and is most effectively used in trading markets that are wide-swinging.
- Relative Strength Index or RSI – Ranging between 0 and 100, the RSI can be used to identify a divergence in which the financial instrument is making a new high while failing to surpass the RSI’s previous high which indicates an impending reversal.
Volumes
These indicators account specifically for volumes where ticks are used in Forex Markets and Stock instruments’ volume refers to the volume of trades that have been executed.
The technical indicators that can be used by traders while utilizing MetaTrader 5 include:
- Accumulation/Distribution – this indicator is determined and dependant on changes that occur in both price and volume, and price changes are confirmed by measuring the respective volumes of certain sales.
- Money Flow Index – this technical indicator specifically indicates the money investment rate into a financial instrument along with the withdrawing thereof.
- On Balance Volume – also known as OBV which relates volume specifically to price change. Should the closing price of the current bar be higher than the previous bar, the volume of the current bar is subsequently added to the previous OBV.
- Volumes – when used in the Forex market, this indicator can tell traders the number of price changes which occur within each period of a specific or selected timeframe.
Bill Williams Indicators
These indicators are divided into a separate group on MetaTrader 5 due to it forming a part of the trading system which is described in Bill Williams’ books.
A few of these indicators include, but are not limited to:
- Accelerator Oscillator – before price changes occur, the direction of the market driving force is changed.
The acceleration of the driving force is then subjected to a decrease in speed in order to reach nought after which it starts accelerating in the opposite direction until the direction of the price starts to change.
- Alligator – markets only generate trends 15-30% of the time and outside of this timeframe, the market remains stationary. Traders who are outside of the exchange itself can derive their profits from the trends when they occur.
- Gator Oscillator – based on the Alligator, this indicator specifically shows the degree of convergence/divergence of the Balance Lines or Smoothed Moving Average.
What are the best MetaTrader 5 indicators?
The MetaTrader 5 trading platform offers traders with a vast amount of technical indicators that can be used either on their own, or in combination with other indicators for the best results.
Some of the absolute best technical indicators that traders can use include, but are not limited to:
- FRAMA, or Fractal Adaptive Moving Average
- The BB MACD
- The Market Facilitation Index (or BW MFI)
- The CCI Arrows Indicator
- The Trade Assistant MetaTrader Indicator
FRAMA
Traders use this technical indicator in an attempt to dynamically adjust the smoothing period of the fractal geometry by exploiting it and through doing so, suit a changing price over a certain period of time.
Financial markets are considered to be fractal and this indicator takes full advantage of just that.
Price movements can be viewed in a similar way to fractal shapes in that they can either be rough or fragmented along with being able to split them into parts and viewing them in different timeframes which allows the trader to identify the fractal shape.
BB MACD
This indicator is a combination between Bollinger Bands (BB) and Moving Average Convergence Divergence or MACD.
Where Bollinger Bands establish a band, which consists of likely support or resistance levels and where they may lie, MACD shows the relationship which exists between two moving averages of prices.
When used in combination, the MACD line is used as the central line between the Bollinger Bands and should it change colour, it tells the trader that it is an opportune moment to buy.
BW MFI
This indicator presents any price changes for a specified tick. When traders open new positions that are in the direction of the bar development and movement has commenced, the BW MFI will enlarge, and volumes will grow in addition to the pace of growth increasing.
It serves the purpose of showing traders when there are players in a particular market by increasing and in turn when it decreases, so will the volume. When this happens, the trader will be able to see that there are no longer any interested parties within the market.
Should the BW MFI increase but the volume falls, it shows traders that there is no support in the market pertaining to volume from certain clients and therefore the price is likely to change in accordance with the trader’s speculations.
CCI Arrows
This indicator serves the purpose of indicating when the CCI Arrows, or Commodity Channel Index Arrows, cross the 0 line by drawing an arrow which points in the specified direction of this cross. This can be done without having to place the CCI indicator on the chart.
This indicator is extremely responsive to changes in price with minimal lag when compared to the RSI indicator. This indicator is perfect to determine the market situation and whether the trader finds themselves in either a bearish or bullish condition.
Trade Assistant MetaTrader Indicator
This indicator comprises of three others namely RSI, CCI Arrows and the Stochastic Oscillator. Ideally, it is used along with the M5, M30, M15, H4, D1 and H1 timeframes to demonstrate contemporary trend directions.
This indicator can however be attached to any of the timeframes, but it is important to note that the input parameters must not be changed.
Traders are advised to buy and sell only when an identical direction is signalled by all the indicators within their timeframe along with both timeframes that neighbour that one.
Conclusion
MetaTrader 5 has a comprehensive and advanced offering when considering not only the amount of technical indicators provided, but the various ways in which they can be applied and combined to provide traders with a detailed technical analysis.
Conducting a technical analysis is one of most important ways in which traders are able to test their trading strategies and MetaTrader 5 provides the perfect environment designed for this purpose in addition to being able to use these strategies in a live environment.
Not only is the built-in package impressive, but MetaTrader 5 also offers traders access to downloading more indicators in addition to allowing traders to develop their own through MQL5 after which traders can import them to the platform for use.
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