Trend Trading: The 4 Most Common Indicators

The possibility exists that you could lose more than your initial deposit. Fill in the fields like this: Potential buy signals occur when the MACD moves above zero, and potential sell signals when it crosses below zero. At point number three the pairs start to consolidate and the trend is most likely over. This indicator was invented and developed by John Bollinger, a financial analyst, in the s. There are many indicators that can fit this bill.

Trend indicators in Forex reflect three tendencies in price movements: Up moves, Down moves and Sideways price moves. Trend indicators help defining the prevailing direction - trend - of the price moves by smoothing price data over a certain period of time.

Indicator No.1: A Trend-Following Tool

In this article, we provide general guidelines and prospective strategies for each of the four common indicators. Use these or tweak them to create your own personal strategy. Moving averages "smooth" price data by creating a single flowing line.

The line represents the average price over a period of time. Which moving average the trader decides to use is determined by the time frame in which he or she trades. For investors and long-term trend followers, the day, day and day simple moving average are popular choices. There are several ways to utilize the moving average. The first is to look at the angle of the moving average. If it is mostly moving horizontally for an extended amount of time, then the price isn't trending , it is ranging.

If the moving average line is angled up, an uptrend is underway. Moving averages don't predict though; they simply show what the price is doing, on average, over a period of time. Crossovers are another way to utilize moving averages. By plotting a day and day moving average on your chart, a buy signal occurs when the day crosses above the day.

A sell signal occurs when the day drops below the day. The time frames can be altered to suit your individual trading time frame. It is possible to make money using a countertrend approach to trading. However, for most traders the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the trend 's direction.

This is where trend-following tools come into play. Many people try to use them as separate trading system; while this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long position or a short position.

So let's consider one of the simplest trend-following methods — the moving average crossover. A simple moving average represents the average closing price over a certain number of days. To elaborate, let's look at two simple examples — one longer term, one shorter term. For related information on moving averages, see " Exploring the Exponentially Weighted Moving Average. The theory here is that the trend is favorable when the day moving average is above the day average and unfavorable when the day is below the day.

As the chart shows, this combination does a good job of identifying the major trend of the market — at least most of the time. However, no matter what moving-average combination you choose to use, there will be whipsaws. The advantage of this combination is that it will react more quickly to changes in price trends than the previous pair. Many investors will proclaim a particular combination to be the best, but the reality is, there is no "best" moving average combination. In the end, forex traders will benefit most by deciding what combination or combinations fits best with their time frames.

From there, the trend — as shown by these indicators — should be used to tell traders if they should trade long or trade short; it should not be relied on to time entries and exits. For additional information, check out " Forex: Now we have a trend-following tool to tell us whether the major trend of a given currency pair is up or down.

But how reliable is that indicator? As mentioned earlier, trend-following tools are prone to being whipsawed. So it would be nice to have a way to gauge whether the current trend-following indicator is correct or not. For this, we will employ a trend-confirmation tool. Much like a trend-following tool, a trend-confirmation tool may or may not be intended to generate specific buy and sell signals. Instead, we are looking to see if the trend-following tool and the trend-confirmation tool agree.

In essence, if both the trend-following tool and the trend-confirmation tool are bullish , then a trader can more confidently consider taking a long trade in the currency pair in question. Trends last long, because economic events often reinforce and compound themselves for example, the impact of interest rate reductions is compounded by increased bank-lending, and increased lending leads to more employment, which leads to more economic activity, which leads to more lending and so on , and the trend follower is simply recognizing the results of these powerful driver forces, while he may not be aware of their causes.

The best way to identify trends is confirming them with their sustaining fundamental drivers. When the trader is unwilling to adhere to this healthy practice, he can make use of the indicators developed by technical analysis in order to identify trends at their early or intermediate phases of their development.

We will now examine some of the different types of indicators used to identify and evaluate various trends. Moving averages are the most simple kind of trend-following indicators. The main difference between exponential and simple moving averages is that while the former attaches greatest significance to the most recent period, the latter weighs each period the present included equally.

In other words, the exponential moving average is more sensitive to the price action of today. In general, the longer the period of a moving average, the slower it responds to price action, and the later its signals will be. Moving averages are simple, and their strength and utility is in their simplicity.

In many cases, a one hundred day moving average is an excellent trend indicator in its own, with its one drawback lying in its tardiness in giving signals. But the tardiness is as much an advantage as it is a disadvantage: The simple moving average. The exponential moving average. This indicator was invented and developed by John Bollinger, a financial analyst, in the s.

Indicator No.2: A Trend-Confirmation Tool

Forex Trend Indicator Videos. We have a few short videos to show traders how to set up the indicators, if the written instructions above are not clear. The videos will show you . Once more, knowing the trend is crucial to success. The important thing is: you must be able to identify forex trends if you are going to trade the forex market. To do this many traders employ a trend indicator. The definition of a trend indicator is a bit loose. Indicator No A Trend-Following Tool It is possible to make money using a countertrend approach to trading. However, for most traders the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the trend 's direction.