Introduction to the Heat Map Indicator
Many traders use historical price movements and the volume of those price movements as a basis for identifying price ranges and breakout price levels. These types of indicators are often coined as Heat Maps as it shows traders the price range which saw the most trading volume.
What is the Heat Map Indicator?
The Heat Map Indicator is a custom technical indicator which identifies and highlights price zones or price ranges where price action is more likely to have the most activity. This indicator simply plots a red bar on the area which it projects where price is more likely to be very active. It also plots the red bar in gradients. The darker the color red is, the higher the activity of price is more likely to be in that area. The lighter the color red is, the lower the activity of price is in that area. Darker red mean the hotter the price zone is, thus the name Heat Map Indicator.
How the Heat Map Indicator Works?
This indicator has a simple algorithm within its program script which begins with identifying the last median of price action. It then uses that median as the starting point or midpoint of the heat map. This indicator then has a preset zone price range which it measures from the identified midpoint of the range. It then plots the heat map based on the distance of the preset zone price range above and below the latest identified midpoint of price. It also detects the historical volume of transactions based on a preset number of periods back. It then uses the volume data to identify the red color gradient assigned on each price zone.
How to use the Heat Map Indicator for MT4
The Heat Map Indicator has a few indicator settings which traders can use to modify the typical range of the identified Heat Map.
“HMPeriod” refers to the number of bars the Heat Map indicator uses to identify the activity of price in that particular price zone.
“Scale” refers to the scale multiplier used on the price zone to measure the distance between the high of the range and the low of the range.
“NbZone” refers to the range which would be used as the base to measure the range of the price zone from its midpoint.
This indicator can be used by traders to have an informed assumption as to where price is more likely to move based on the Heat Map color gradients. Some traders assume that areas where price action and volume is high is an area which is usually difficult to break out of and areas with low trade activities are easier to break out of. As such, some traders would trade breakouts in the direction of the lighter colored area.
Others would have the opposite assumption. Knowing that the darker colored gradient has the most transactions, they would identify it as the relevant price range and would rather trade reversals within that area.
Conclusion
The Heat Map Indicator is not an indicator which provides a clear and objective indication as to where price may break out or reverse. It only provides color gradients based on historical transactions. However, this information can still be used by traders to identify their chosen trade direction. This indicator can be used in confluence with other technical analysis based trade setups.
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