Trend indicators are used to follow the price movements of an asset in a particular direction. Traders will plot them on their charts to try and clearly identify the direction of the market.
What are the Trend Indicators?
Trend indicators are based on mathematical calculations that illustrate signal lines to identify the market situation.
Types of Trend traders
There are plethora of trend indicators. Some of the most common are:
- Moving Averages
- MACD (moving average convergence divergence)
- RSI (relative strength index)
- Bollinger Bands
- OBV (on balance volume)
- Fibonacci retracements
- ADX (average directional index)
- Ichimoku cloud
- Standard deviation
Here’s an explanation of these trend indicators:
1. Moving Averages
The moving average identifies the direction of a current price trend. The MA combines a particular asset’s price over a certain period and then divides price value by several data points. This forms a single trend line.
The period of the MA can vary like the 200-day MA or the 20-day MA. Traders can find key support and resistance levels by using moving averages. The MA comes in two variations: SMA (simple moving average) and the EMA (exponential moving average).
The MACD detects price fluctuations by comparing two moving averages.
Convergence means a closer distance of two moving averages. Divergence means distant two moving averages. If moving averages are converging, it means a downward momentum, while if the moving averages are diverging, there is an upward momentum.
The RSI is a type of oscillator that identifies key price patterns.
The RSI ranges between 0 and 100. If the price of the asset is above or near 70, it is an overbought condition. On the other hand, if the RSI shows values below 30, it is an oversold condition.
An overbought signal suggests a strong buying pressure, and the price may fall in the future. Conversely, an oversold signal means strong selling pressure, and price may rise in the future.
The stochastics work exactly like the RSI. It compares the closing process of an asset with the current price. It fluctuates between 0 and 100.
A reading above 80 signals an overbought condition, while the reading below 20 signifies an oversold condition.
5. Bollinger Band
The Bollinger compromises of a range in which price moves. The width of the band increases and decreases to present market volatility. It consists of an upper band and the lower band. If the price moves above the upper band, it is an overbought signal. Whereas, if the price moves below the lower band, it’s an oversold signal.
6. On-balance Volume
As the name suggests, the OBV measures buying and selling pressure by adding and subtracting volume.
If the price is rising, the OBV will increase also, and if the price is dropping, the OBV will drop.
7. Fibonacci Retracements
Fibonacci retracement uses Fibonacci ratios to indicate market movements. Retracement occurs when the markets experience a temporary downfall and are also called pullbacks.
Fibonacci retracement indicator applies Fibonacci numbers to present ratios that identify support and resistance levels. Traders may then take buy or sell positions at support or resistance levels.
8. Average Directional Index
The ADX presents the strength of a current trend. It is based on the 14-day moving average.
The ADX ranges between 0 and 100. If the value of ADX is more than 25, then there is a strong uptrend, and traders may trade buy positions. Contrarily, when the values are below 25, traders may look to take short positions.
The ADX rises with falling prices and declines with rising prices.
9. Ichimoku Cloud
The Ichimoku Cloud, like Fibonacci retracements, signifies support, and resistance levels. However, it also predicts price movements.
The Ichimoku Cloud pinpoints exact entry and exit points, giving traders a fine trading methodology.
10. Standard Deviation
The SD gauges size of the price movements. It uses mathematical calculations to compare current price movements with the past moves. Thereby, signifying market volatility.
Trend Indicator conclusion
Trend indicators can be used on your trading platform charts to help filter potential trading signals and predict price movements as part of an overall trading strategy. To fully utilize them, a trader may wish to combine indicators like moving averages with RSI.
I would prefer to use the majority of market analysis such as Trend Indicators on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
Trend Indicators are just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing Trend Indicators into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with Trend Indicators, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.