Trend traders try to isolate and extract profit from trends. There are multiple ways to do this. No single indicator will punch your ticket to market riches, as trading involves other factors such as risk management and trading psychology as well. However, certain indicators have stood the test of time and remain popular among-st trend traders. This article will focus on most common indicators used in trend trading.
Moving averages smooth price data by creating a single flowing line. The line refers to the average price over a period of time, which moving average the trader decides to use is determined by the time frame on which he/she trades. For investors and long-term trend followers, the 200-day, 100-day, and 50-day simple moving average are popular choices.
There are several ways to use 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 it is angled up, an uptrend is underway.
MACD (Moving Average Convergence Divergence)
The MACD is an oscillating indicator, fluctuating above and below zero. It is both a trend following and momentum indicator.
One basic MACD strategy is to look at which side of zero the MACD lines are on. Above zero for a sustained period of time and the trend is likely up; below zero for a sustained period of time and the trend is likely down. Potential buy signals occur when the MACD moves above zero and potential sell signals when it crosses below zero.
RSI (Relative Strength Index)
The RSI is another oscillator, but because its movement contains between zero and 100, it provides some different information than the MACD. One way to interpret the RSI is by viewing the price as “overbought” – and due for a correction – when the indicator is above 70, and the price as oversold – and due for a bounce – when the indicator is below 30. In a strong uptrend, the price will often reach 70 and beyond for sustained periods, and downtrends can stay at 30 or below for a long time.
While general overbought and oversold levels can be occasionally accurate, they may not provide the timeliest signals for trend traders.
On Balance Volume (OBV)
The volume itself is a valuable indicator, and OBV takes a lot of volume information and compiles it into a signal one-line indicator. The indicator measures cumulative buying/selling pressure by adding the volume on up days and subtracting volume on losing days.
Ideally, volume should confirm trends. A rising price should go along with a rising OBV; a falling price should go along with a falling OBV.
Indicators can simplify price information, as well as provide trend trade signals or warn of reversals. Indicators can be used on all time frames, and have adjusted variables to suit each trader’s specific preferences. Combine indicator strategies, or come up with your own guidelines, so entry and exit criteria are clearly established for trades.
See Also: Why Trend Trading?
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