Trend Trading: & The 4 Most Common Indicators I Use
- orionstafa
- May 30, 2022
- 5 min read
Traders who trade trends try to pinpoint and benefit from them. Trend trading is a means of capturing profits by analyzing an asset's momentum in a specific direction; there are several ways to do this. Of course, no single technical indication will guarantee market success; traders must also understand risk management and trading psychology in addition to technical analysis. Certain tactics, on the other hand, have weathered the test of time and continue to be popular with trend traders who want to analyze specific market indications.
Moving Averages
A moving average is a technical analysis tool that smooths out price data by calculating an average price that is regularly updated. A moving average provides a single, flat line on a price chart, thereby removing any changes caused by random price swings.
The average is calculated over a set length of time–10 days, 20 minutes, 30 weeks, or whatever the trader specifies. The 200-day, 100-day, and 50-day simple moving averages are popular among investors and long-term trend observers.
The moving average can be used in a variety of ways. The first step is to examine the moving average's angle. If the price is largely moving horizontally for an extended period of time, it isn't trending; instead, it is ranging. When a securities trades between constant high and low prices for a period of time, this is known as a trading range.
An uptrend is in progress if the moving average line is inclined up. Moving averages, on the other hand, don't offer forecasts about a stock's future worth; they just reflect what the price is doing on average over time.
Moving average crossovers are another way to use them. When you display a 200-day and 50-day moving average on your chart, the 50-day crosses above the 200-day, you'll get a buy signal. When the 50-day falls below the 200-day, it signals a sell signal. 1
The time frames can be changed to fit your specific trading needs.
#CRM Daily
It can also be used as a buy signal when the price crosses above a moving average, and it can be used as a sell signal when the price crosses below a moving average.
However, because the price is more volatile than the moving average, as shown in the chart above, this strategy is more prone to false alerts.
Moving averages can also act as price support or resistance.
1 A 100-day moving average acts as resistance in the chart below (i.e., the price bounces off of it).
#AMD Hourly
Moving Average Convergence Divergence (MACD)
The MACD (moving average convergence divergence) is an oscillating indicator. A technical analysis indication that varies over time inside a band is known as an oscillating indicator (above and below a centerline; the MACD fluctuates above and below zero). It's a trend-following as well as a momentum indicator.
Looking at which side of zero the MACD lines are in the histogram underneath the chart is one basic MACD approach. The stock is most likely heading upwards if the MACD lines are above zero for an extended length of time. In contrast, if the MACD lines are consistently below zero, the trend is most certainly down. When the MACD crosses above zero, potential purchase indications appear, and when it goes below zero, potential sell signals appear. 2
Additional buy and sell signals can be provided by signal line crossovers. There are two lines in a MACD: a fast line and a slow line. When the fast line crosses through and above the slow line, it is a buy indication. When the fast line crosses through and below the slow line, it is a sell signal. 2
Relative Strength Index (RSI)
The relative strength index (RSI) is another oscillating indicator, but its movement is limited to a range of zero to one hundred, therefore it delivers information that is distinct from the MACD.
When the indication in the histogram is above 70, the price is considered "overbought"—and due for a correction—and when the indicator is below 30.3, the price is considered "oversold"—and due for a bounce.
During a strong upswing, the price will frequently rise above 70 or higher for extended periods of time. In downtrends, the price can stay at 30 or lower for an extended period of time. While overall overbought and oversold levels can be accurate at times, they may not offer trend traders with the timeliest signals. 3
When the trend is up, purchase near oversold conditions and put a short bet near an overbought condition when the trend is down.
Assume that a stock's long-term trend is positive. When the RSI falls below 50 and then rises above it, this is a buy signal. This essentially suggests that there has been a price drop. As a result, the trader buys when the downturn appears to be over (as indicated by the RSI) and the trend is continuing. Because the RSI does not normally hit 30 in an upswing unless a probable reversal is underway, the 50-levels are used. When the trend is down and the RSI swings above 50 and then back below it, this is a short-trade indicator. 3
Trendlines or a moving average can aid in determining the direction of the trend and the direction in which to take trading signals.
On-Balance Volume (OBV)
Volume is a valuable indicator in and of itself, and on-balance volume (OBV) collects a substantial quantity of volume data into a single one-line indicator. The indicator adds volume on "up" days and subtracts volume on "down" days to calculate cumulative purchasing and selling pressure. 4
The volume should, in theory, confirm trends. If the price is rising, the OBV should also be rising; if the price is falling, the OBV should be falling. 4
The chart below depicts Netflix Inc. (NFLX) stock rising in tandem with OBV. Because OBV did not fall below its trendline, it was a good sign that the price would likely continue to rise despite the pullbacks.
If the OBV is rising but the price isn't, the price is likely to follow the OBV and start climbing in the future. If the price is growing while the OBV is flattening or declining, the price could be approaching a peak. If the price is declining while the OBV is flat or climbing, the price may be approaching a bottom. 4
The Bottom Line
Indicators can help to simplify price information while also offering trend trade indications and reversal warnings. Indicators can be utilized on any time frame, and they usually feature variables that can be tweaked to suit each trader's tastes. Traders can mix indicator tactics or create their own rules to produce clear entry and exit criteria for trades.
Learning to trade on indications is a difficult task. If you're interested in learning more about a particular indicator, you can do so. Most importantly, testing it out before utilizing it to make actual trades is a good idea. For those who have never traded before, it's crucial to understand that opening a brokerage account is a prerequisite for gaining access to the stock market. Coinbase is pretty good for Bitcoin and Crypto and Robinhood is perfect for beginners its friendly and gives you access to the market
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Tips
I try to stick to 2 or 3 indicators and those are RSI and Volume at all times, then sometimes I add OBV and MACD
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