CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trend analysis is one of the most popular tools for beginner traders. It reveals the general market direction and allows traders to ride the trend or take advantage of a larger price movement in a given direction. Trend traders use technical indicators to identify a trend and take advantage of trading opportunities before it reverses.
The biggest advantage of trend trading is that the strategies are simpler than other trading styles and there are multiple entry points throughout the trend, offering numerous opportunities for traders to take advantage of. However, careful analysis is critical to ensure that trend reversal does not reverse the gains too.
There is no particular price point or duration for the price to be said to be trending. It continues till the direction is sustained. The longer the price maintains direction, the more apparent a trend becomes. Regardless of the trend duration, day traders, scalpers, swing traders, or high-frequency traders can trade a trend based on their trading window. This is where trend indicators are needed. They help traders to:
Trend trading may be done during an uptrend, downtrend, or sideways trend with the right trading strategy. Here are the best 5 trend indicators to help you make informed decisions.
A plot of moving averages on the price movement chart reveals a trend. Most commonly a 200-period SMA curve is used to identify a trend. If the price is consistently above the SMA line, the market is bullish; whereas it is bearish if the price is below the SMA line.
In addition to the 200-period SMA, often the 20- or 50-period are used to gauge the strength of the trend. If the smaller SMAs are in-sync with the longer ones, it is a signal that the trend will sustain.
The MACD indicator uses multiple EMAs (exponential moving averages) to produce buy and sell signals for traders. It uses four lines:
When the MACD line crosses the signal line from below, it is a signal to buy and when it crosses from above, it is a signal to sell.
This indicator consists of 3 lines. The middle line is the SMA of the price action. The upper and lower lines (bands) are the standard deviations from the middle line. The bands form a channel around the price, forming the support and resistance levels.
For trend trading with BBs, traders look for a Bollinger Squeeze, i.e., when the distance between the upper and lower bands narrows closer to the SMA. A Bollinger squeeze signals an impending breakout, marking the onset of a trend. Entering a trend early is a great trend trading strategy for improving the chances of gains. However, to make better trading decisions, traders prefer confirming the signals with another indicator. This is necessary because a squeeze only implies that a breakout may occur but not its direction or strength.
Due to the multiple lines and zones in which it divides the price chart, the Ichimoku Cloud could appear complex, but it isn’t. Here’s the breakdown of the Ichimoku indicator:
The standard line is the trend identifier. When the price breaks above it, the onset of an uptrend is signalled and when it breaks out below the standard line, a downtrend is said to begin. The two lines of the Senkou Span work as dynamic support and resistance levels. So, if the price breaks above, the lower one is the first resistance level and the higher one is the second. If the price breaks out below the standard line, the higher one is the first resistance level and the lower one the second support level.
The Tenkan Sen or the turning line is used to confirm a trend. When it follows the direction of the trend, it confirms the trend, and if it doesn’t, the signal may be false and the market might be ranging.
ADX is a trend-indicating oscillator. It oscillates between 0 and 100 to signal the strength of a trend. It helps traders steer clear of false signals. However, it does not indicate the trend direction.
The ADX calculation involves identifying the true range (TR) and directional movement (DM) of the price. Finally, the periodic values are smoothened out by dividing the 14-day smoothened DM by the 14-day smoothened TR and multiplying the result by 100. The same is done for +DM and -DM. Finally, DMI is calculated by dividing the difference between the two by their sum.
A value above 50 indicates a strong trend and a value below 20 indicates a weak trend.
The good thing is you don’t need to do any of these calculations manually. The best online trading platforms provide all these indicators readily applicable on price charts. In most cases, the timeframe for each indicator is adjustable.
Experienced traders also test their trend trading strategy with their preferred trend indicators on a demo account before using it on the live markets.
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