How To Use Indicators

There are 4 basic concepts that you need to know:

1. There are Rules and there are Values. Rules decide when an action is allowed. They evaluate to Yes/True/Do or No/False/Don't. Values decide where that action will be done. They evaluate to a single price on the chart - the price where you want to place an order; the price where you want to move the stop loss or take profit.
2. Relative Strength Index (RSI) is an example of an Indicator.
3. RSI(14) though, is a line on the chart. It is the combination of indicator plus the parameters that creates a line. RSI(14) is a different line to RSI(20).
4. Everything is a line. The close price is a line. Volume is a line. The entry price of a particular trade is a (flat) line. RSI(14) is a line. RSI(20) is another line.

Rules

To get a line into something that can become a true/false answer means that we must compare it. We compare it:

• With a particular number - is Line 1 above 100?
• With its previous values - is Line 1 going up?
• With a different line - is Line 1 above Line 2?
• With the entry price - is Line 1 above than the entry?

The first step then, is to choose what kind of comparison will be done. Here are the options:
 

Use the value of a line

• Line 1 equals X
• Line 1 is above X
• Line 1 is below X
• Line 1 is in a range
• Line 1 is not in a range
   

Compare the value of a line to the line's previous values

• Line 1 is rising
• Line 1 is falling
• Line 1's value is the least of the last X values
• Line 1's value is the most of the last X values
   

Compare the value of a line to the value of a different line

• Line 1 is equal to Line 2
• Line 1 is above Line 2
• Line 1 is above Line 2 by more than X
• Line 1 is above Line 2 by less than X
• Line 1 is below Line 2
• Line 1 is below Line 2 by more than X
• Line 1 is below Line 2 by less than X
• Line 1 is apart from Line 2 by more than X
• Line 1 is apart from Line 2 by less than X
   

Compare the value of a line to the trade's entry price

• Line 1 is above the trade's entry price
• Line 1 is above the trade's entry price by more than X
• Line 1 is above the trade's entry price by less than X
• Line 1 is below the trade's entry price
• Line 1 is below the trade's entry price by more than X
• Line 1 is below the trade's entry price by less than X
   

Those last ones can only be used for non-entry rules.

Anyhow, with one of those selected, all that's left is to fill in the details for Line 1 (and Line 2 if applicable).

A common entry rule is "the close of the bar is above the simple moving average". The close price is just a line, and so is the average, so you would use "Line 1 is above Line 2" - Line 1 is the close, and Line 2 is the average. When this is true the signal is given.
 

Values

Values are easier, because you don't need to bother with the options above. You just create a line and that is the value. E.g. put a take profit at the entry price plus 50 pips, the stop loss at a simple moving average, etc.
 

More Options

You are given these very basic options to modify a line:

• Line + X
• Line * Y
• (Line + X) * Y
• (Line * Y) + X

Negative numbers can be used for X and Y.

What these settings allow you to do are to add/subtract a certain number of pips or percentage. For example:

• Close price plus 5% would be: Close * 1.05
• High plus 50 pips would be: High + 0.0050 (for EUR/USD)

If you need more than these basic options, you can create a custom indicator.
 

Indicators which normally consist of more than 1 line

If you think of the Bollinger Band indicator, you normally think of 3 lines - upper, middle, and lower. But for our purposes, those are actually 3 different Indicators:

1. Bollinger Band Upper Line
2. Bollinger Band Middle Line
3. Bollinger Band Lower Line

And this is true for any indicator which normally consists of more than a single line.
 

Indicators which normally wouldn't be considered Indicators

How can candlesticks be "a line"? Well, at its simplest, a bar either fits a candlestick pattern or it does not. Candlesticks are therefore in a true/false form. But that doesn't fit into the "everything is a line" theory. So instead of thinking in terms of true/false, change it to 1/0.

Most of the time, a candlestick pattern will not be present. The "indicator" value stays at zero. When the candlestick pattern appears, the indicator spikes up to 1. Then back down to zero when the pattern is gone.

What was just described is simply an oscillating indicator, with values ranging between 0 and 1. That's now a line which can be used like any other line. So the basic concept is to replace true/false results and anything similar, with numbers. 0/1. 1/2. -100/100. It doesn't really matter as long as they are numbers.

So let's say we use 0 (zero) for when the candlestick pattern is not there, and 100 when the candlestick pattern is there. To make a rule that uses that candlestick pattern, use "Line 1 equals X" - Line 1 is the candlestick, and set X to 100. When this is true the signal is given.

It turns out candlesticks are actually a little more complex than true/false, anyway. The following are possible:

• the candlestick pattern is present in a bullish way (result: 100)
• the candlestick pattern is present in a bearish way (result: -100)
• the candlestick pattern is not present (result: 0)

Further, there are a couple of candlestick patterns that give five values: 200, 100, -100, -200, zero. You should chart the candlestick you are interested in to see its possible range of values. And that's the beauty of treating everything as a line - you can chart and visualise all indicators and see how they behave.

Note: peak and trough (and swing) calculations, "Current Pattern" and "Previous Pattern" are also treated as oscillating indicators:

• Higher Peak = 2
• Higher Trough = 1
• Lower Trough = -1
• Lower Peak = -2