Traders Dynamic Index Indicator for MT4 explained
The Traders Dynamic Index or TDI for short is a versatile trading indicator. The TDI indicator for MT4 is built to be used with the MetaTrader 4 trading platform. This indicator is also known as a hybrid indicator because it makes of the relative strength index, moving averages and volatility bands.
The TDI is most suitable for scalpers and the original use of this indicator was indeed to be used on the 5-minute chart. However, the indicator has found its way into swing trading and day trading as well.
The TDI indicator for MT4 has earned the name for providing a full market picture depending on the time frame to which the indicator is applied. One of the biggest advantages of using the TDI indicator is that it eliminates the need of having to use three different indicators separately.
The Traders Dynamic Index indicator for MT4 was designed by a trader Dan Malone. The indicator was designed to perform a complete market analysis where in the indicator would ascertain the direction of the trend, its strength and also shows periods when volatility is rising.
When you combine these three elements, you basically have all the information you need to trade.
When the conditions are right and when signaled by the TDI indicator, you can easily trade when the conditions are most ideal.
The indicator was released as early as 2005 which is relatively new when compared to other technical indicators. However, the TDI has managed to quickly grow in popularity as one of the most sought after custom indicators.
It is not surprising then that the traders dynamic index is one of the most popular custom trading indicator that was designed.
The Traders Dynamic Index indicator for MT4 allows for more customizations including enabling visual and audio alerts. In this article we will look deeper into how you can use the TDI indicator for MT4 to scalp the forex markets.
The TDI of course can be used not just to scalp but also to day or swing trade the markets. However, the original design of the indicator was made to be used on smaller time frame charts such as the 5-minute chart or the 15-minute chart.
As with any form of scalping, traders should be aware of the spread and other conditions that can change from one forex broker to another.
What is the Traders Dynamic Index indicator?
The TDI indicator’s primary purpose is to filter the markets when there is no trend. Once this is filtered and the TDI identifies the trend, the next stage of the indicator is to distinguish the price movements.
This includes finding areas of entry points that traders can trade in the short to medium term timeframe. It is for this reason that the TDI uses three separate indicators which are the RSI, Bollinger Bands and moving averages.
If you independently analyze the TDI indicator, you can see that the moving averages are used to determine the trend, while the Bollinger bands detect periods of high and low volatility through the contraction and expansion of the bands.
Finally, the missing piece to the puzzle is the relative strength index or RSI indicator. The RSI is an oscillator which is used to gauge the momentum. When you combine the information from these three indicators you can see that a powerful trading strategy can emerge.
While it is possible to trade with the three indicators separately, the information can at times be confusing. This is where the TDI comes into the picture, giving the trader a comprehensive view of the markets. Thus, with just the signals from one indicator to go by, it also reduces the complexity.
The TDI indicator is built as an oscillator and when you add the indicator you can see in the sub-window on your MT4 platform.
The chart below shows the TDI indicator added to a 15-minute chart.
Figure 1: Traders Dynamic Index indicator – MT4
Configuring the Traders Dynamic index indicator
The TDI indicator has a lot of settings. This means that it can be highly customized. You can either choose the default settings or make use of your own custom settings. The purpose of this next section is to illustrate the different parameters of the TDI that can be configured.
The next picture below shows the configuration window of the Traders Dynamic Index indicator for the MT4 trading platform.
Figure 2: TDI Indicator MT4 Configuration
- RSI Period: The default setting is set to 13. This basically determines the number of previous sessions or candlesticks that you want the RSI to be build upon. You can set this to a higher value but the RSI would then start to lag. Likewise, if the setting is too small, it can make the TDI a bit too sensitive to market swings. The best way to identify the setting you want to use is to figure out a setting that works for you if you were to use the RSI indicator on its own.
- RSI Price: The default setting for this is Price_Close. This determines what price to calculate the RSI for. You can choose other options such as using opening, closing, high or low prices. Bear in mind that the type of price you choose can impact how the indicator works. The closing price is often considered to be the most important price in a price chart. However, some traders tend to prefer using other prices as well.
- Volatility Band: The volatility band setting determines the Bollinger band settings. The default is set to 34. However, if you were using the Bollinger bands on its own, you would use a setting of 21. Therefore, this parameter is also up for customization and the value you want to choose depends on your comfort and familiarity level with the indicator. With the settings, note that if you set the volatility band to a lower level, it can become more sensitive.
- StdDev: As with any volatility bands, the standard deviation is an important factor. The Standard deviation basically determines how much of deviation you would like to use. While the Bollinger bands uses a 2 standard deviation, the TDI indicator comes with a default setting of 1.618. The reasoning behind this is nothing but using the Fibonacci level. You can of course change this and set it two as you would when using the Bollinger band indicator.
- RSI_Price_Line: The default value of this is 2. The RSI price line is basically the setting for the fast moving average.
- RSI_Price_Type: The default is set to MODE_SMA. This is nothing but how the moving average is to be calculated. You can change the mode to anything that is available from the drop down.
- RSI_Trade_Signal_Line: The default value is set to 7 and this is the setting for the slow moving average line.
- RSI_Trade_Signal_Type: The default value for this is the MODE_SMA. This is the moving average type for the trade signal line. It is recommended that the mode for the trade signal type remains the same as the value that you choose for the price_type. But of course, traders are free to experience with the moving average types to suit the best need for the market that they are trading. However, the SMA is known to be lagging as compared to the EMA and therefore, the EMA would make for a better choice.
- UseAlerts: The default is set to false because this parameter simply signals an audio alert every time a signal is generated.
TDI indicator MT4 – Trading Signals
Trading signals are generated based on two different modes. The long and short signals are taken based on the below logic.
A long signal is generated when the green line crosses above the red line. You can of course wait for the green line to cross above the red and the yellow line as well. In some cases, depending on how strong the momentum is, you can wait for the crossover to occur and when all the three lines are above the 50-level of the indicator.
Figure 3 TDI Indicator MT4 – Long signal example
In the above chart a long signal is shown. The vertical line marks the entry of the trade with the horizontal line depicting the entry price. You can see that the long signal is generated when the Green line cuts above the yellow and the red line.
At the same time, the bands start to expand within a few sessions. This implies that the market momentum is rising alongside rising volatility. Therefore, you can see that following the trigger of the signal, price started to rise rapidly leading to a strong gain in the long position that would have been open.
A short signal is generated when the green line crosses below the red line. You can also wait for the green line to cross below both the red and the yellow lines. Momentum based short signals are derived when the green line crosses below the red and yellow lines and all the three are below the value of 50 on the indicator.
Figure 4 TDI Indicator MT4 – Short signal example
In figure 4, you can see an example of a short signal that was triggered. Similar to the illustration from figure 4, the short signal comes after the Green line cuts below the yellow and the red line.
At the same time, the bands are also well expanded signaling volatility that is already existing in the market.
After the short signal is triggered, you can see price rapidly falling after the short position was triggered.
Additionally, you can also look to volatility. This happens when the bands are expanding, just like it does when you use the Bollinger bands. In such scenarios, the markets are perfectly aligned and trading long or short during expanding bands can yield strong and quick results for your trades. However, such trades are to come by. Therefore, it is up to the trade if they can find a disciplined approach to trading with the TDI indicator for MT4.
So far, the TDI has shown how and where to take the entry of the trade. From here on, it is up to the trader to decide where they want to place their stops and entries. This is subjective and therefore the methods can vary from one trader to another.
But to get you started, you can set the stops by locating the nearest swing high (in case of a short position) or the nearest swing low (in case of a long position). You can set the stop loss a few pips above or below this swing high or low point.
For target, you can start with a 1:2 set up and find different combinations. Because the TDI can signal good market conditions, you can basically look at other methods such as trailing your stops or building up positions to capitalize on the trading signals.
Alternately, you can also look for support and resistance levels or the Parabolic Stop and Reverse (PSAR) indicator to trail your stops accordingly.
Traders Dynamic Index indicator for MT4 – Summary
To summarize, the TDI indicator for MT4 is a complete trading system that can bring about a new change to your existing trading strategies. Whether you are scalping the markets or swing trading, the TDI indicator can give you a full and all round perspective of the markets.
Due to the fact that the TDI makes use of three different indicators which measure three different aspects of price, namely the trend, momentum and volatility, you can experience a different way of trading without having to use the signals from the three indicators.
The TDI is therefore a versatile indicator that traders flock to. The main advantage of using the TDI indicator for MT4 is that it cuts down on clutter on your charts. It also eliminates the need for using any additional indicator when you use the TDI in your trading strategy.
Given the vast amount of configuration to play around with, traders can also build familiarity with the TDI indicator and also customize this indicator to their choice or preference. This will ensure that the indicator is well configured to capture the security’s volatility and other market conditions.