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 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 upon 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.
Relative strength index (RSI) and Moving Average Convergence Divergence (MACD) are the best trend trading indicators designed to gauge momentum and identify the current trends. They attempt to measure the strength of the trend and give traders a feeling for their strength.
How to determine forex trend direction?
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 trend and declare that it’s going down. In cases like these, the primary difference is each trader users’ timeframe when approaching a trend identifier.
This is why you need to know and understand the timeframe you are using before you start trying to identify any trend directions. 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 identifying 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.
Uptrends downtrends and ranges
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 what these terms mean to understand these trend indicators better.
Uptrend refers to higher highs and lows. Downtrend refers to lower highs and lows. And the 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 that remains above the 50MA (moving average), and weak trends have a steep pullback that remains above the 200MA.
The best trend indicator video tutorial
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, monumental trends, and 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 precious 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 to 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 when 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 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 chart’s most important element 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 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 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 summarizing 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, the 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 determine the strength of a trend instead, 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 that 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 to be a helpful reflection of overall trend direction and strength. The 3 steps you need to take 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 an uptrend. If the trendline is pointing lower on the chart, then the direction is a downtrend.
If you are trying to determine the overall strength of a current trend, you need to take a closer look at your trendline’s angle. 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; it is difficult for the trendline to be useful during ranges.
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 similarly to trendlines, except they need to be run parallel 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, you still find yourself stumped or unsure about identifying the trend. You need to take advantage of one of the most overlooked yet precious trend indicator 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 ocean. This same principle 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 essential component for identifying short-term trends.
Remember: the above trendlines are not crystal balls, nor will they give you all the answers. However, they will provide you with a much better chance of understanding how to identify trends and make more informed financial choices based on that identification.