Trend indicators are an essential part of trading–but they can also be one of the most frustrating aspects of trading if you don’t know how to use them or you are using the wrong ones. Trend indicators are not crystal balls; they won’t always give you clear or accurate answers, and relying totally on trend indicators to make your decisions is certainly not recommended. But knowing how to use trend indicators, and knowing which trend indicators can actually work for you, is one of the best ways to make better trade decisions and increase your chances for financial success.
Let’s take a closer look at how you should be using trend indicators for the best results.
A Note About Identifying Trend Directions
Trends are not finite; some might even say that trends are illusions due to the constant manipulation of trends depending on your timeframe and other factors. One trader might look at a trend and say that the trend is going up, while another trader might look at the same exact trend and declare that it’s going down. In cases like these, the primary difference is the timeframe that each trader users when approaching a trend identifier.
This is why before you start trying to identify any trend directions, you need to know and understand the timeframe that you are using. Some considerations to keep in mind when you are choosing a timeframe:
• Traders who are on a day trader timeframe are typically on the 30 minutes timeframe and below
• Traders who are on the swing trader timeframe are typically on the 1 to 4 hour timeframe
• Traders who are on the position trade timeframe are on the 4 hour timeframe with some traders being above 4 hours
Once you have chosen the right timeframe for your circumstances, you need to hone in on that timeframe when attempting to identify the right trend indicators for your needs.
With that out of the way, let’s take a more in-depth look at the 5 trend indicators that actually work.
A Note Before You Read On
Throughout the following trend indicator guides, we will refer to the concepts of uptrends, downtrends and ranges. It’s important to have a quick refresher on one these terms mean in order to better understand how to use these trend indicators.
Uptrend refers to higher highs and lows. Downtrend refers to lower highs and lows. And range is contained between highs and lows.
You will also need to know what “Strong,” “healthy” and “weak” trends mean in the context of trading trends. Strong trends have little to no pullback on their price; healthy trends have a healthy pullback which remains above the 50MA (moving average); and weak trends are trends which have a steep pullback which remains above the 200MA.
The best trend indicator
Trend Indicator #1: Price Action
The first trend indicator we will be looking at is price action. Price action refers to the careful reading of the current market structure, momentum and monumental trends, as well as sentiment. These three factors combined can be used to identify the potential in various trade opportunities.
Price action is considered to be one of the most valuable types of trend indicators. The reason for this is all three of these factors provide highly valuable insight into the trade market, including: where losing trades ‘puke,’; where traders are placing their stops; and where new traders will enter the market.
When you know the price action, you will have valuable data that can help you understand the various line charts and other trend indicators featured in the rest of this guide.
Trend Indicator #2: Identifying Trend Direction (Without Candlestick Charts)
Candlestick charts are difficult to use, especially in cases where the ‘wicks’ in the chart are exceptionally long; this makes it much more difficult to identify the past and current trends on the chart. That is why it is better to identify trend direction without using candlestick charts. Instead, line charts should be used for an easy to digest format that will give you a clear picture of various trending factors.
Line charts will show you the various closing prices which are connected via a line, hence the name “line chart.” Line charts appear much cleaner than candlestick charts, and are typically better for identifying broader trends thanks to their design.
When identifying trend direction via a line chart, the most important element of the chart to look at is the direction of the line. Is the line pointing higher as the chart goes on? This means it’s an uptrend. Is the line pointing lower as the chart goes on? This means it’s a downtrend. Is the line flat as the chart goes on? This means it’s a range.
The one downside to using line charts is that they only use the closing price; whereas candlestick charts use the high/low prices. Line charts should not be used exclusively but as part of a comprehensive trading system to help you identify the general direction of a trend without getting bogged down in precise details.
Trend Indicator #3: Moving Average
Moving average is another trend indicator that will actually work. Moving average refers to a summarization of past prices which are then plotted onto a line chart to give you an idea of the moving average of those prices. A moving average indicator chart will help you identify the overall direction and, most importantly, strength of a particular trend.
For the easiest way to use a moving average to identify a broader direction of a trend, you need to consider these two factors:
if the current price is above the 200MA (Moving Average) then the trend is a long-term uptrend. If the current price is below the 200MA, then the trend is a long-term downtrend.
When you want to use the moving average to instead determine the strength of a trend, consider the following factors:
If the price tends to stay above the 20MA, then it is a strong trend. If the price tends to stay above the 50MA, then it is a healthy trend. If it tends to stay below these MA numbers, then it is a weak trend.
In general, this trend indicator is most useful in markets that are in uptrend or downtrend–but is relatively insignificant in markets which are in a range.
Trend Indicator #4: Trendline
A trendline is a unique tool indicator tool that you can draw on your trending charts. A trendline will help you more accurately identify the direction and strength of a trend, but only if you are using it in the right way.
Trendlines need to be done accurately in order to be a helpful reflection of overall trend direction and strength. The 3 steps you need to take in order to draw a proper trendline are:
• First, look for at least two swing points, whether they are a higher low or lower high
• Next, connect these swing points using a trendline
• Make sure to get in as many “touches” as possible on the trendline
Once you have the trendline finished, then you can interpret it. If the trendline is pointing higher on the chart, then the direction is uptrend. if the trendline is pointing lower on the chart, then the direction is downtrend.
If you are trying to determine the overall strength of a current trend, then you need to take a closer look at the angle of your trendline. How steep is it? How flat is it? As a general rule of thumb: the steeper the trendline, the stronger the trend; the flatter the trendline, the weaker the trend.
Trendlines are most effective in cases where the trends are uptrend or downtrend; during ranges, it is difficult for the trendline to be useful.
Trend Indicator #5: Channels
The final trend indicator that will actually work for you is Channels. A Channel is a special variation of a standard Trendline that runs parallel to the trendline and helps you properly identify the potential for opposing pressure on a trend. The Channel can help you get profit ahead of time before a higher probability of reversal occurs.
Channels are plotted in a similar manner to trendlines, except they need to be run parallel in order to allow you to view both the trendline data trend and the Channel data trend at the same time. Thankfully, online software makes it easier than ever to have Channels plotted on the same chart as trendlines, so you will be able to easily tell the difference between these two vital pieces of information.
What To Do When You’re Stumped
If you’ve employed all of the above trend indicators but you still find yourself stumpted or unsure about identifying the trend, then you need to take advantage of one of the most overlooked yet highly avaluable trend idnicator techniques available: looking at the big picture.
If you focus on the trees, you miss the forest–if you focus on the water, you miss the coean. This same principal applies to trends. If you are only looking at the current prices, then you will miss the long-term trends.
In other words: zoom out your trend charts to see a broader view of the current trends. You will be able to more easily identify trends when you can see where they started versus where they are now. Long-term trends are just as valuable as short-term trends; in fact, long-term trends are an essental component for identifying short-term trends.
Remember: the above trendlines are not crystal balls nor will they give you all the answers. They will, however, provide you with a much better chance of understanding how to identify trends and make more informed financial choices based on that identification.
