Absolute Strength Indicator: What You Should Know
The Absolute Strength indicator is an MT4 based indicator that gives a clear picture of the Absolute Strength of the price action. This brilliant indicator can be deployed for day trading or intraday trading using any Forex trading strategy.
The Absolute Strength Indicator is easy to spot when included in a chart as it works as a histogram. Using this indicator traders can get an additional confirmation for when to enter or exit a trade.
What’s unique about it is that it helps determine the absolute strength of the currency or asset class chart it is applied to. Once applied to a chart, the Absolute Strength indicator is clearly visible on the chart as it combines both a histogram and a moving average line to provide traders with all the information they need to enter or exit a trade.
Why should traders use the Absolute Strength indicator?
Traders who use the Absolute Strength indicator deploy it because it helps them gauge the strength of the trading session it is applied to, especially in terms of price action. It tends to change depending on the time frame it is applied to.
While it looks pretty similar to other histograms such as MACD (you can read about the Zero Lag MACD here) and the awesome oscillator, what’s special about this one is that it focuses more on the price action rather than other indicators.
Using it traders can seamlessly generate, buy and sell signals based on the strength of the asset and the way it is close to the average, as shown on the chart.
Of course it's always a smart move to use other trading indicators or technical strategies along with the Absolute Strength indicator to build a trading strategy. Relying on only it for buy and sell signals is a recipe for failure since it isn’t accurate all the time.
For traders who would like to test the waters, we suggest deploying it on a demo trading account for a while and testing its performance before using it to trade the real markets.
Absolute Strength indicator: How does it work?
It is a custom indicator designed for the MT4 platform. But to explore all its perks, you’ll need to download it and install it directly into the MT4 indicator folder. Once that’s done, you need to restart your MT4 app and refresh the indicators to activate it.
If you did this right, you should see the histogram indicator pop up in your MT4 terminal. Also, you can drag and drop the indicator into any chart of your choice. When navigating this indicator, you should be able to see its specs as shown below:
While the image above displays the configuration window for the Absolute Strength indicator, we will show you additional details and explanations for other settings that come with it. Let’s jump in, shall we?
Mode: The default for this setting is set to zero. That said, you can tweak the value to 1. When set at zero, the RSI method is applied. On the flip side, the Stochastic method is applied when the value is changed to 1.
Length: The default setting for this configuration is 9. This setting is pretty much a lookback session for the indicator. For instance, when the value is tweaked, the Absolute Strength indicator recalibrates itself to display the number of sessions or bars to look back on. And yes, traders can tweak the value according to the time frame they prefer.
Smooth: This setting is used to check the period of smoothing. Also, the value is set to one. This means that the smoothing period is one. And like other settings we have highlighted so far, this one too can be changed. Unfortunately, the higher you set the smoothing session, the more the indicator lags.
Signal: This setting gives a clear picture of the lookback period for the average line or the signal line. The default configuration for this setting is 4. And like the smoothing factor, the value you input can either make the indicator lag or be sensitive to price.
Price: This setting has to do with inputting the value of the price point to calculate. And as you may already know, there are four types of price, including the open price, high, low, and close. You also have the median price outside of these prices, which is the average of the high, low, and close.
To tweak these settings, traders have to use the following values 0= Close, 1= Open 2= High, 3= Low, 4= Median, 5= Typical, 6= Weighted.
The reality is that changing these values doesn’t make any significant difference or give you an edge. To this end, we highly recommend keeping these values at default, especially for the closing price.
ModeMA: The default value for this configuration is three. This mode displays the moving average. If you have been trading for some time, you’ll know that there are a couple of different moving averages. For clarity purposes, 0 indicates simple moving average, 1 displays exponential moving averages, 2 shows the smoothed moving average, and 3 displays linear weighted moving average. According to experts, using either simple or exponential moving averages gives a better outlook.
Mode Histo: This setting is important for plotting how the histogram should be displayed. By changing the values from 0 to 5, you can enable or disable the signal line, the average line, or tweak the histogram to an oscillator. Basically, this configuration helps traders configure how they would like the histogram to work.
If you have configured it correctly and successfully applied it to your chart, it should look like this:
Absolute Strength Indicator: Summary
The Absolute Strength indicator is used to gauge the strength of the price action. Suppose the price action is bullish; you should notice the histogram breakout from the signal line. This shows that the strength is strong. Also, the histogram shows when the trend is weak.
Traders who deploy this indicator for their trading sessions use it to spot, buy and sell opportunities, especially since it shows when the strength rises and falls. Also, the histogram displays buy and sell signals, especially when there is a bullish or bearish crossover as indicated by the moving average.
You might also interested in How profitable is the Zero lag MACD? and What is the Beep Boop indicator? Theory, strategies and 100 tests.