THE BEST TREND TRADING INDICATORS

THE BEST TREND TRADING INDICATORS


Trend traders attempt to isolate and extract profit from trends. The method of trend trading tries to capture gains through the analysis of an asset’s momentum in a particular direction; there are multiple ways to do this. Of course, no single technical indicator will punch your ticket to market riches; in addition to analysis, traders also need to be well-versed in risk management and trading psychology. But certain strategies have stood the test of time and remain popular tools for trend traders who are interested in analyzing certain market indicators.

 

KEY TAKEAWAYS
Trend trading attempts to capture gains through the analysis of an asset’s momentum in a particular direction.
While no single technical indicator will punch your ticket to market riches, certain strategies have stood the test of time and remain popular tools for trend traders.
Moving average is a technical analysis tool that smooths out price data by creating a constantly updated average price.
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The moving average convergence divergence (MACD) is a kind of oscillating indicator that can help traders quickly spot increasing short-term momentum.
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The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock.
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The on-balance volume (OBV) indicator measures cumulative buying and selling pressure by adding the volume on “up” days and subtracting volume on “down” days.
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Moving Averages
Moving average is a technical analysis tool that smooths out price data by creating a constantly updated average price. On a price chart, a moving average creates a single, flat line that effectively eliminates any variations due to random price fluctuations.

 

 

The average is taken over a specific period of time–10 days, 20 minutes, 30 weeks, or any time period the trader chooses. 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 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. A trading range occurs when a security trades between consistent high and low prices for a period such as days, weeks, or months. Many traders use strategies that follow these trading patterns.

 

 

If the moving average line is angled up, an uptrend is underway. However, moving averages don’t make predictions about the future value of a stock; they simply reveal what the price is doing, on average, over a period of time.

Crossovers are another way to utilize moving averages. By plotting a 200-day and 50-day moving average on your chart, a buy signal occurs when the 50-day crosses above the 200-day. A sell signal occurs when the 50-day drops below the 200-day.
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The time frames can be altered to suit your individual trading timeframe.

 

 

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

However, since the price is more volatile than the moving average, this method is prone to more false signals, as the chart above shows.

Moving averages can also provide support or resistance to the price.
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The chart below shows a 100-day moving average acting as support (i.e., the price bounces off of it).

 

 

Moving Average Convergence Divergence (MACD)
The moving average convergence divergence (MACD) is a kind of oscillating indicator. An oscillating indicator is a technical analysis indicator that varies over time within a band (above and below a centerline; the MACD fluctuates 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 in the histogram below the chart. If the MACD lines are above zero for a sustained period of time, the stock is likely trending upwards. Conversely, if the MACD lines are below zero for a sustained period of time, the trend is likely down. Using this strategy, potential buy signals occur when the MACD moves above zero, and potential sell signals when it crosses below zero.
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Traders frequently pair MACD with support and resistance candlestick charts.

Signal line crossovers can also provide additional buy and sell signals. A MACD has two lines—a fast line and a slow line. A buy signal occurs when the fast line crosses through and above the slow line. A sell signal occurs when the fast line crosses through and below the slow line.

 

 

 

Relative Strength Index (RSI)
The relative strength index (RSI) is another oscillating indicator but its movement is contained between zero and 100 so it provides 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 in the histogram is above 70, and viewing the price as oversold—and due for a bounce—when the indicator is below 30.
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In a strong uptrend, the price will often reach 70 and beyond for sustained periods of time. For downtrends, the price can stay at 30 or below for a long time. While general overbought and oversold levels can be accurate occasionally, they may not provide the most timely signals for trend traders.
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An alternative is to buy close to oversold conditions when the trend is up and place a short trade near an overbought condition in a downtrend.

For example, suppose the long-term trend of a stock is up. A buy signal occurs when the RSI moves below 50 and then back above it. Essentially, this means a pullback in price has occurred. So the trader buys once the pullback appears to have ended (according to the RSI) and the trend is resuming. The 50-levels are used because the RSI doesn’t typically reach 30 in an uptrend unless a potential reversal is underway. A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.
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Trendlines or a moving average can help establish the trend direction and in which direction to take trade signals.

 

On-Balance Volume (OBV)
Volume itself is a valuable indicator, and on-balance volume (OBV) takes a significant amount of volume information and compiles it into a single one-line indicator. The indicator measures cumulative buying and selling pressure by adding the volume on “up” days and subtracting volume on “down” days.
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Ideally, the volume should confirm trends. A rising price should be accompanied by a rising OBV; a falling price should be accompanied by a falling OBV.
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The figure below shows the shares of Netflix Inc. (NFLX) trending higher along with OBV. Since OBV didn’t drop below its trendline, it was a good indication that the price was likely to continue trending higher even after the pullbacks.

 

 

If OBV is rising and the price isn’t, it’s likely that the price will follow the OBV in the future and start rising. If the price is rising and OBV is flat-lining or falling, the price may be near a top. If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom.
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The Bottom Line
Indicators can simplify price information, in addition to providing trend trade signals and providing warnings about reversals. Indicators can be used on all time frames, and for the most part, they have variables that can be adjusted to suit each trader’s specific preferences. Traders can combine indicator strategies–or come up with their own guidelines–so entry and exit criteria are clearly established for trades. Complementary trend indicators include pairing the MACD and stochastic. Another popular pair is the stochastic oscillator combined with the Average Directional Index (ADX) indicator.

 

Learning to trade on indicators can be a tricky process. If a particular indicator appeals to you, you may decide to research it further. Most importantly, it’s a good idea to test it out before using it to make live trades. For those who have never actively traded before, it’s important to know that opening a brokerage account is a necessary first step in order to gain access to the stock market.

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The 9 Best & Most Accurate Trend Indicators for Day Trading

Trend trading is the practice of following an already formed trend in the financial market. It differs from reversal trading, which is all about identifying periods when an existing trend is about to form.

Trend-following, when done right, is the best-trading strategy in the world because it lets traders make money for a long time. As we will note in this article, there are many popular indicators that people can use in this strategy. It is also an easy-to-use strategy among beginner traders.

Most trend traders use several technical indicators to help them make these decisions better. In this article, we will look at the top nine best trend trading indicators to use in day trading.

Why traders need trend indicators
To follow the trend
To know when to exit
To know when to buy or short
To identify stop-loss and a take-profit
Most accurate trend indicators
Moving Average
MACD
Relative Strength Index (RSI)
Bollinger Bands
Ichimoku Kinko Hyo
Stochastic Oscillator
ADX
Advance-Decline Line (ADL)
On Balance Volume (OBV)
Donchian Channels to follow the trend
Summary
Why traders need trend indicators
Trend indicators are essential in day trading for a number of reasons. Some of these common reasons are:

To follow the trend
The first main reason why it is important to use trend indicators is that they help you follow a trend well. For example, in the chart below, we see that the Apple shares are rising and are above the 50-day moving average. In this case, a trader can decide to maintain the bullish trade as long as it is above the MA.

To know when to exit
This is another reason why people use trend indicators is to know when to exit a trade. Just as in the example above, one can use the moving average to know when to exit it.

If it moves below the moving average and you are long, it is a sign that you should exit the trade.

To know when to buy or short
The other reason why you need trend indicators is to know when to buy or short an asset. For example, you can use moving average strategies like a golden cross and a death cross to idenytify when to buy or sell an asset. A golden cross happens when the 200-day and 50-day moving averages make a crossover.

To identify stop-loss and a take-profit
Finally, trend indicators can help you identify areas to place your stop-loss and take-profit. In some cases, you can place a stop-loss at the 50-day or a 25-day moving average.

Most accurate trend indicators
Moving Average
Moving averages are the most popular indicators in the market. In fact, they form the foundation of other indicators like Bollinger Bands and MACD.

There are several strategies of using moving averages, including reversals. But the most popular one is in trend trading. This is where you add a moving average on a chart and hold the trade so long as the price is above or below this moving average.

In the chart below, a trend trader would have continued to hold the Alphabet shares so long as the price was above the 50-day exponential moving average (EMA).

Other types of moving averages uses are simple, smoothed, and hull, among others.

 

 

 

Trading Trend with EMA (Alphabet stock)
MACD
The Moving Average Convergence Divergence (MACD) is an oscillator that is derived from two moving averages. By default, the fast MA has a length of 12 while the slow MA has a length of 26. The MACD is popularly used in trend following and in reversals trading strategy.

In reversals, the signal emerges when the two moving averages make a crossover below the neutral line. When a bullish trend is on, the two lines keep rising, with the signal line being lower than the MACD line. After crossing the neutral line, the two lines must remain there during a bullish trend.

The chart below shows the MACD applied on the Alphabet chart.

 

Trading Trend with MACD (Alphabet Stock)

 

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is the most popular oscillator in the financial market. You have probably heard more about it in popular financial trading shows, including by Jim Cramer.

The indicator identifies the momentum of assets like stocks, currencies, and exchange-traded funds (ETFs).

In most cases, the Relative Strength Index is used to identify overbought and oversold levels. An asset is said to be extremely overbought when its price has been in an extended period of gains. It is said to be oversold after falling substantially over time,

As you may have guessed from the main topic of the article, You can use the RSI indicator in trend following as well. Buy signals emerge when the indicator keeps moving upwards while sell signals come out when the indicator keeps falling.

The chart below shows the RSI indicator applied on the Apple shares chart.

 

 

Trading Trend with RSI (Apple Stock)

Bollinger Bands

Bollinger Bands is an indicator that is derived from moving averages and standard deviation. The middle line of the indicator is the moving average of a certain period while the upper and lower line are the standard deviations. In most cases, the moving average used is usually 20 while the standard deviation is 2 (with 0 offset).

Bollinger Bands are mostly used in trend following strategy. In most cases, during an uptrend, the price usually remains between the middle and upper lines of the indicator. Therefore, the idea is to buy so long as the price is between these two lines.

On the other hand, sell signals emerge when the price is between the lower and the middle line. A bearish trend will be strong when the price is along the lower line of the bands. The chart below shows the Bollinger Bands applied on the Apple shares.

 

 

 

Trading Trend with Bollinger Bands (Apple Stock)
Ichimoku Kinko Hyo
The Ichimoku Kinko Hyo is the scariest technical indicators in the market. However, experienced traders view it as one of the easiest-to-use and one of the most accurate. The indicator is made up of several lines, including the conversion, baseline, lagging span, and lead 1 and 2.

There are several strategies of trading using the Ichimoku cloud. For example, you can identify reversals when the conversion and base lines make a crossover. You can also use it in trend following. You can use two main approaches to this.

First, you can use the Ichmoku cloud. A bullish trend remains in a bullish view when the price is above the Ichimoku cloud. Second, you can use the lagging line. In a bullish trend, the price will be above the lagging line.

The chart below shows the Ichimoku on the Apple shares.

 

 

 

 

 

 

Trading Trend with Bollinger Bands (Apple Stock)
Ichimoku Kinko Hyo
The Ichimoku Kinko Hyo is the scariest technical indicators in the market. However, experienced traders view it as one of the easiest-to-use and one of the most accurate. The indicator is made up of several lines, including the conversion, baseline, lagging span, and lead 1 and 2.

There are several strategies of trading using the Ichimoku cloud. For example, you can identify reversals when the conversion and base lines make a crossover. You can also use it in trend following. You can use two main approaches to this.

First, you can use the Ichmoku cloud. A bullish trend remains in a bullish view when the price is above the Ichimoku cloud. Second, you can use the lagging line. In a bullish trend, the price will be above the lagging line.

The chart below shows the Ichimoku on the Apple shares.


Trading Trend with Ichimoku (Apple Stock)

 

Stochastic Oscillator

The Stochastic is a popular oscillator that is mostly used to identify overbought and oversold levels. The indicator has two lines that are known as %D and %K. It also has the upper band and lower band, which are at 80 and 20.

In most cases, buy signals emerge when the two lines make a crossover below the lower band while sell signals are made when there is a crossover above the upper band. After the crossover, the bullish trend remains as long as the two lines are moving upwards and vice versa, as shown below.

 

 

Trading Trend with Stochastic (Apple Stock)
ADX
The Average Directional Moving Average (ADX) is an indicator that is widely used in trend trading (mostly to measure the strength of the trend). The indicator resembles oscillators like the Relative Strength Index (RSI) and momentum indicators. It ranges between zero and 100.

In most cases, a bullish trend will remain so long as the ADX is rising and vice versa. However, many critics point to the fact that this indicator tends to provide the wrong signals several times. We refer you to the dedicated page to find out more about strategies for using the ADX.

 

 

 

Trading Trend with ADX (Apple Stock)
Advance-Decline Line (ADL)
The Advance-Decline Line is an indicator that is popularly used to trade indices like the Dow Jones and the S&P 500. The indicator is calculated by looking at the number of advancing stocks and those that are falling in a session.

If the number of advancing shares is more than those that are falling, the indicator will keep rising, and vice versa. If the indicator is falling even as the indicator rises, it tells you that the rally is being controlled by just a few companies.

The chart below shows the ADX applied on the S&P 500 index.

 

Trading Trend with ADL (S&P 500)
On Balance Volume (OBV)
The On Balance Volume is an indicator that is relatively similar to the ADL. Instead of looking at the number of advancing and falling stocks, it looks at their volume (a very important point for day traders).

Ideally, a bullish trend remains intact as long as the On-Balance-Volume is rising and vice versa. The chart below shows the OBV indicator used in the financial market.

 

 

 

Trading Trend with OBV (Apple Stock)

Donchian Channels to follow the trend

 

The Donchian Channels is an indicator that resembles the Bollinger Bands. It has three lines, with one in the middle and two others surrounding it. The only difference between the two is their calculation. In the Donchian Channels, you simply identify a period and identify the highest and lowest points. These will form the outer bands of the channel. The middle line will be the average of the two.

Like in the Bollinger Bands, the price will always remain in a bullish trend as long as it is between the middle and upper lines of the bands. If it moves below the middle line, it is said to be the start of the end of the bullish trend.

Similarly, in a bearish trend, the price will keep dropping so long as it is between the lower and middle lines of the channel, as shown in the chart below.

 

Donchian channels in trend following
There are other indicators that are popular in trend following. For example, many day traders use oscillators like the moving average convergence and divergence (MACD) and the Relative Strength Index (RSI) using this strategy.

Summary
In this article, we have looked at some of the most popular indicators that traders use to follow the trends. Some like the moving averages are relatively popular and more accurate than the others like on-balance volume and advance-decline line.

 

 

 

 

 

Why You Should Trade with the Trend

The rationale to trend trading is if the market is already moving up, it’s given at least some evidence of its bullish bias so it makes sense to follow that.

For this reason, trend trading is also called “trend following” because instead of guessing which way the market is going to move, you wait for it to establish a direction. After that’s clear, you simply jump onboard and follow the trend that has already begun.

Trends make your life easier

“An object in motion tends to stay in motion” is part of Newton’s first law of motion. You can certainly argue that such a law of physics doesn’t directly apply to the financial markets. However, when large financial institutions managing enormous amounts of money make a commitment to a market, that market will indeed often continue in that direction.

Such institutions aren’t able to bring all of their financial power into a market at one time without disrupting the pricing structure of that market. In other words, if they were to use all of their buying power at once, it would create such a demand versus supply imbalance that the price of that market would skyrocket.

The institution would have to pay exponentially higher prices as the asks evaporated and the bids moved up in an almost parabolic fashion.

Everyone wants to buy at as low a price as possible, so institutions leg into a position slowly over time in an effort to hide their intentions and keep the prices they have to pay for that market low.

The best time to enter a trend is as early in the trend as possible. The famous saying, “the trend is your friend,” is countered by, “the trend is your friend until the end.”

Identifying a trend is one of the easiest chart patterns to recognize. You can clearly look at a chart and see whether the market is moving up or down. As opposed to more sophisticated and complicated chart patterns, a trending market is the easiest pattern to spot.

Trend trading is also simple for traders. In assuming you’ve correctly identified a long-lasting trend, there isn’t much for you to do after you’ve entered the trade. Trends are long-term moves, so the best thing you can do as a trend trader is to hold tight and enjoy the ride. You don’t need to micromanage the trade.

Trends can make you more money

Trend trading is a good style of trading, not only for its simplicity but also for its profitability.

To evaluate the effectiveness of your trading, measure the following ratios:

Win/loss ratio: The number of your winning trades divided by the number of your losing trades

Risk/reward ratio: The amount of money you initially risk on a trade (from your entry to your stop loss) versus the amount of money you make on a trade

You want to make more money on your winning trades than the amount you lose on your failed trades. When you’re winning trades make a lot more money than your losing trades, it makes the losing trades much easier to handle.

Because trends are long-term moves, the rewards of successful trend trades are much bigger than the amount of risk taken on the trade. This is good for you both financially and psychologically.

The psychology of trading is a vital aspect to being successful. Losses can be hard to take and can create a distressing emotional state in which it’s hard for you to trade with a clear mind. On the other hand, the perfect trade method doesn’t exist, so all trading methods experience losses. How you mentally handle those losses is a vital part of determining whether you’ll survive and thrive as a profitable trader.

The figure illustrates an example of the small risk compared to the potential large reward of a successful trend trade.

 

 

 

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