How To Use The Overlay Chart Indicator MT4
This very useful indicator called ‘Overlay Chart Indicator MT4, can assist the trader in identifying, amongst several benefits, oversold and overbought areas within both correlated and non-correlated currency pairs.
When using the overlay for analysis, you can apply one additional pair to the currency pair you wish to make a comparison with, and you can do the same with several charts and arrange them horizontally on your platform if you want to analyze multiple pairs at the same time. The advantage of this is to observe and follow price movement correlations in real time to help you find potential trades at a glance.
The EURUSD candlesticks below are red and green, and it is the base pair we want to use in comparison to another currency pair. The GBPUSD was added on as an overlay, and you can see that the two pairs move mostly in parity with one another, although not always.
News for a particular currency pair such as the British Pound can sometimes impact its direction and volatility more strongly than the EURO. The chart can be viewed from 1 minute to Monthly, and it is often helpful to zoom in and out from higher to lower time frames, to initially establish market direction.
Finding Discrepancies Within Correlating Price Movement
One way to use the overlay indicator is to help you find entries into the market, via discrepancies in price movement between correlating pairs. If two pairs are moving in sync most of the time, but occasionally fork apart into opposite directions, or one lags behind, the trader can use this to their advantage by identifying the direction price is moving on the base pair, in the instance below.
In the chart below the arrows at #1 shows how price is moving down, but then drops further on the correlated pair (yellow candles), which in this instance is the EURCAD. The base pair, the EURUSD, has already turned up while the EURCAD drops below that.
So at the point where the EURCAD turns up, at the first candle, the trader could have taken a long trade there, since the direction has already been established by the EURUSD. In the second example, #2, you can see how the EURUSD (green & red candles) moves up, and the correlating pair drops. That is another opportunity to take a long trade on the correlating pair, the EURCAD.
Using The Overlay Indicator To Find Crossovers
Locating crossovers within price movement via moving averages, and other indicators, proves to be a very reliable means of identifying trend reversals. When you can add additional confirmation to what you already have, it greatly increases your odds that you are correctly identifying a trend reversal. This works on all time frames using the overlay chart indicator by putting together two currency pairs that are inverse, or non-correlating, such as the GBPUSD vs the USDCAD.
In the first chart example you can see clearly where the two pairs cross, the GBPUSD to the downside, and the USDCAD moving away, and up. The USDCAD doesn't mirror the GBP exactly, but pulls back after two bullish candles on the Daily chart, yet it does resume the uptrend eventually. In this example, a 40 moving average has been added, and you can see that the crossover on the USDCAD pair (blue candles) coincides with the crossing of the moving average, thus giving strong confirmation of a trend reversal for the USDCAD.
In the second chart, the base pair, the EURUSD did not crossover, it was already on a downtrend but it did touch and reverse at the MA, confirming the continuation of its downtrend. The second chart below gives yet another example of a non-correlating pair (USDCHF) crossing over the 40 moving average, and opposite the base pair, showing a clear opportunity for a long trade. This is a great method for scalping on lower time frames, and with the MA to confirm price action, you can feel confident in taking that trade.
Using The Overlay Chart To View Multiple Pairs
You can arrange multiple charts on your MT4 platform by creating separate windows and horizontally tiling them. This way you can keep your MT4 open to continuously view the action at a glance. You can set it up on a demo account, to separate your charts if you have multiple ones set up, and avoid having a cluttered up chart.
In the example below, you see 3 different pairs with correlating or inverse pairs, and you can set it up any way you want. You will be able to quickly spot the divergences and crossovers in price action, in both correlating and non-correlating pairs.
The Overlay Chart Indicator, In Conclusion
By setting up and keeping multiple windows open with overlay pairs, it enables you to easily find trade entries with correlating and non-correlating pairs that are moving in tandem, or, in disparity. Use it with a moving average to pinpoint your entries. The overlay chart indicator has an underlying grid which encompasses the highs and lows over a period of time.
These highs and lows within the grid are also showing the recent overbought and oversold areas. It is price movement within a recent range, and when it’s hitting top or bottom within the grid, it can indicate an imminent reversal.
Whether price is in overbought or oversold territory should also be confirmed with the use of additional indicators such as RSI, Stochastics, and candlestick patterns. If you start seeing a lot of price pullback and candle shadows forming, it could be signaling exhaustion of momentum.
The grid lines often correspond with support and resistance levels as can be seen on the chart above, USDCAD vs the CADJPY. All in all, when you use the overlay chart with other indicators, it provides you with a good amount of additional information towards making optimal trading decisions.