Trend trading: 4 most common indicators

Trend traders try to separate from the trend and extract profits. The trend trading method attempts to obtain profit by analyzing the momentum of the asset in a specific direction; there are many ways to do this. Of course, there is no single technical indicator that can impress your market wealth; in addition to analysis, traders also need to be proficient in risk management and trading psychology. But some strategies have withstood the test of time and remain popular tools for trend traders who are interested in analyzing certain market indicators.

Key points

  • Trend trading attempts to gain profit by analyzing the momentum of assets in a specific direction.
  • Although there is no single technical indicator that allows you to gain market wealth, some strategies have withstood the test of time and are still popular tools for trend traders.
  • Moving average is a technical analysis tool that smooths price data by creating constantly updated average prices.
  • Moving Average Convergence Divergence (MACD) is an oscillatory indicator that can help traders quickly find increased short-term momentum.
  • The Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes to assess the overbought or oversold status of stock prices.
  • The Balanced Trading Volume (OBV) indicator measures the cumulative buying and selling pressure by adding the trading volume on the “up” day and subtracting the trading volume on the “down” day.

Moving average

Moving average is a technical analysis tool that smooths price data by creating constantly updated average prices. On the price chart, the moving average creates a single, flat line, effectively eliminating any changes due to random price fluctuations.

The average is taken from a specific time period-10 days, 20 minutes, 30 weeks or any time period chosen by the trader. For investors and long-term trend followers, 200-day, 100-day, and 50-day simple moving averages are popular choices.

There are several ways to use moving averages. The first is to look at the angle of the moving average. If it mainly moves horizontally for a long period of time, then the price is not a trend, but an interval fluctuation. When securities are traded between a consistent high and low price over a period of time, a trading range appears.

If the moving average is sloping upward, the uptrend is in progress. However, moving averages do not make predictions about the future value of stocks; they only reveal the average movement of prices over a period of time.

Crossovers are another way to use moving averages. By drawing 200-day and 50-day moving averages on the chart, a buy signal appears when the 50-antenna crosses the 200-antenna. When 50 days falls below 200 days, a sell signal will appear.You can change the time range to suit your personal trading time range.

When the price crosses the moving average line, it can also be used as a signal to buy, and when the price crosses the moving average line, it can be used as a signal to sell.

However, since the price is more unstable than the moving average, this method is prone to produce more false signals, as shown in the figure above.

Moving averages can also provide support or resistance to prices.The chart below shows the 100-day moving average as support (that is, the price rebounds from it).

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is an oscillatory indicator. An oscillator is a technical analysis indicator that changes over time within a band (above and below the center line; MACD fluctuates above and below zero). It is both a trend-following indicator and a momentum indicator.

A basic MACD strategy is to look at which side of the MACD line is at zero in the histogram below the chart. If the MACD line is higher than zero for a period of time, the stock may show an upward trend. Conversely, if the MACD line is below zero for a sustained period of time, the trend may decline. Using this strategy, when the MACD is above zero, a potential buy signal will appear, and when it is below zero, a potential sell signal will appear.

Signal line crossings can also provide additional buy and sell signals. MACD has two lines-a fast line and a slow line. When the fast line crosses the slow line and is higher than the slow line, a buy signal will appear. When the fast line crosses the slow line and falls below the slow line, a sell signal will appear.

Relative Strength Index (RSI)

Relative Strength Index (RSI) is another oscillatory indicator, but its fluctuation range is between 0 and 100, so it provides different information from MACD.

One way to interpret the RSI is to consider the price as “overbought” when the indicator in the histogram is above 70-and should be corrected; when the indicator is below 70, consider the price as oversold-and There should be a rebound 30.

In a strong uptrend, the price will usually reach 70 or higher for a sustained period of time. For a downtrend, the price can stay at or below 30 for a long time. Although general overbought and oversold levels may sometimes be accurate, they may not provide trend traders with the most timely signals.

Another option is to buy near oversold conditions when the trend is rising, and short trades near the overbought conditions in a downtrend.

For example, suppose the long-term trend of a stock is upward. When the RSI drops below 50 and then returns to above 50, a buy signal will appear. Essentially, this means that the price has pulled back. Therefore, once the pullback seems to have ended (according to the RSI) and the trend is recovering, traders will buy.The 50 level is used because the RSI usually does not reach 30 in an uptrend, unless the potential The reversal is in progress. When the trend declines and the RSI rises above 50 and then returns below 50, a short trade signal will appear.

Trend lines or moving averages can help determine the direction of the trend and the direction of taking trading signals.

Equilibrium volume (OBV)

Volume itself is a valuable indicator, and balanced volume (OBV) requires a large amount of volume information and compiles it into a single one-line indicator. This indicator measures cumulative buying and selling pressure by increasing the trading volume on the “up” day and subtracting the trading volume on the “down” day.

Ideally, the volume should confirm the trend. An increase in price should be accompanied by an increase in OBV; a falling price should be accompanied by a falling OBV.

The chart below shows that the stock price of Netflix Inc. (NFLX) is moving higher along with OBV. Since OBV did not break below its trend line, this is a good sign that the price may continue to rise even after the correction.

If the OBV is rising and the price is not rising, then the future price is likely to follow the OBV and start to rise. If the price rises while the OBV stays flat or falls, the price may be close to the top. If the price falls and the OBV remains flat or rises, the price may be close to the bottom.

Bottom line

In addition to providing trend trading signals and providing reversal warnings, indicators can also simplify price information. Indicators can be used in all time frames, and in most cases, they have variables that can be adjusted to suit the specific preferences of each trader. Traders can combine indicator strategies—or propose their own guidelines—thus clearly establishing entry and exit criteria for trading.

Learning to trade based on indicators can be a tricky process. If a particular indicator appeals to you, you can decide to study it further. Most importantly, it is a good idea to test it before using it for real-time trading. For those who have never been active in trading before, it is important to know that opening a brokerage account is a necessary first step in entering the stock market.

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