Trading with Trend Indicators

Trading with Trend Indicators

Any trading platform is offering a bunch of indicators. These are part of the technical analysis and are grouped into two main categories: trend indicators and oscillators. There are other indicators that do not fit exactly into these two categories, but these two are the most important ones.

Trend indicators are prefered by swing traders (traders that have a bigger horizon for their trades – bigger than intraday trading). They are applied directly on the chart, on the actual prices. Like the name suggests, trend indicators follow the trend. Everyone knows that following a trend is rewarding. There is even a famous saying: “the trend is your friend”.

For riding a trend, trend indicators are very useful. The most popular ones are:

  • Bollinger Bands. The Bollinger Bands indicator is formed of three lines that appear directly on the actual chart. These lines are, in fact, averages. The one in the middle is either a simple moving average (SMA) or an exponential moving average (EMA). It is said that the EMA is more relevant for the Bollinger Bands indicator. This moving average, no matter if it is an EMA or an SMA, is called MBB (Middle Bollinger Band). The other ones are UBB (Upper Bollinger Band) and LBB (Lower Bollinger Band) and the price are spending most of the time (more than ninety percent of it) between the UBB and LBB. For this reason, the Bollinger Bands indicator is considered to be a powerful trending indicator as traders can ride the trend easily. With this indicator, traders identify the main trend and look for pullbacks (in a bullish trend) into the MBB and LBB or spikes (in a bearish trend) into the MBB and UBB to re-enter the trend or to add to an existing position.

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  • Moving Averages. Even more famous than the Bollinger Bands, moving averages are displayed on the actual chart too. There are multiple types of moving averages, from simple ones to displaced ones (DMA). The DMA is recently known to retail traders and not all trading platforms offer it. For example, if you want to use it on the MetaTrader, it is not on the default settings, you’ll need to import a custom made indicator to display the DMA on the chart. The idea behind moving averages is to look for crosses between the fastest moving average and the slowest one in order to buy pullbacks in a bearish trend or spikes in a bullish one. No matter the financial product that is traded, be it Forex or cfd trading, the moving average does a great job following the trend.

  • Ichimoku Cloud. This is a special trend indicator. It is applied, of course, on the actual chart, and it shows actual and future support and resistance levels. The cloud can be either bullish (usually green) or bearish (usually red) and this represents the stance of the market: bullish or bearish market. Obviously, traders want to buy in a bullish market (when the cloud is green) and sell in a bearish one (when the cloud is red). The Ichimoku cloud is a powerful tool as it projects future support and resistance levels. The cloud or those levels are projected on the right side of the chart. The classical setup or the default setting sees the cloud projected on the right side of the screen for the next twenty-six periods. If this is the hourly chart, if the price is reaching the cloud in the next twenty-six periods, traders will look to buy/sell, depending on the general trend.

Other trend indicators can be used, but the ones mentioned above are the most important ones. ADX (Average Directional Moving Average) or the Parabolic SAR help to ride a trend too, but in the end, all trend indicators show the same: how to ride a trend. The problem with them is that they are lagging and traders cannot spot changes in the main trend early.