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The Maximum Likelihood indicator is an original technical analysis indicator. This indicator looks at how current market prices over a given period differ from random prices of the same instrument. It can thus determine whether the current price movement is a statistically significant trend.
The Maximum-Likelihood indicator is a variant of the Random-Walk-Index designed by trader Dennis Meyers.
The MLI consists of two lines. The bullish line indicates the strength of a rising trend. The bearish line indicates the strength of a falling trend.
When the bullish line is above the bearish line, the momentum is bullish. When the bullish line is below the bearish line, momentum is bearish.
An MLI greater than 1 indicates a strong, non-random trend. An MLI less than 1 indicates that the market price is moving randomly and showing little strength.
The MLI indicator is shown below the main chart. The green and red histograms indicate a strong, non-random trend. To open a position, traders look for the moment when the MLI increases above 1.
The MLI indicator can be used in three ways:
1. Trend filter
2. Trading signal
3. Stop, for closing the position
This example shows the Maximum Likelihood indicator as a trend filter. We can see that when the indicator rises above 1, it clearly indicates the start of a trend.
This example shows a trader using the MLI as a trading signal. In this case, we see a buy signal. The indicator can give the trader a signal or open a position itself, automatically.
In this example, the MLI indicator indicates the best time to close the position. In the NanoTrader trading platform, closing the position can be done automatically. We see that a short sell position was opened at 09:00, when the MLI rose above 1. When the MLI rises above a certain value, the signal to close the position is triggered. This is clearly timely here.
1. An indicator that can recognise the difference between a trend and random price movements.
2. The MLI can be used on its own or as part of a trading strategy.
3. Many parameters in settings can be adjusted to your own preference.
4. A FREE indicator that is easy to understand and use.
Traders also read: 'Trading with the DeMark indicator' and 'The 2-in-1 candles'