Trend traders attempt 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. But certain indicators have stood the test of time and remain popular amongst trend traders.
Here we provide general guidelines and prospective strategies are provided for each; use these or tweak them to create your own personal strategy. If you are new to technical analysis or want to brush up on your skills, Investopedia Academy's Technical Analysis Course provides an indepth overview of the technical concepts that you need to become a successful trend trader.
Moving averages "smooth" price data by creating a single flowing line. The line represents the average price over a period of time. 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 it 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 both 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. 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.
Since 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. The chart below shows a day moving average acting as support price bounces off of it. The MACD is an oscillating indicator, fluctuating above and below zero.
It is both a trend following and momentum indicator. 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. Signal line crossovers 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. If you want to learn more about this as well as how to transform patterns into actionable trading plans, Investopedia Academy's technical analysis course is a great start.
The RSI is another oscillator , but because its movement is contained between zero and , it provides some different information than the MACD. 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 accurate occasionally, they may not provide the most timely signals for trend traders. Say 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, and the trader is buying once the pullback appears to have ended according to the RSI and the trend is resuming. A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.
Trendlines or a moving average can help establish the trend direction, and in which direction to take trade signals. Volume itself is a valuable indicator, and OBV takes a lot volume information and compiles it into a signal one-line indicator. Ideally, volume should confirm trends. The figure below shows shares for the Los Gatos, Calif. 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 variables that can be adjusted to suit each traders specific preferences.
Combine indicator strategies, or come up with your own guidelines, so entry and exit criteria are clearly established for trades. Each indicator can be used in more ways than outlined. If you like an indicator research it further, and most of all personally test it out before using it to make live trades. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. The Bottom Line Indicators can simplify price information, as well as provide trend trade signals or warn of reversals. How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
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