Trend Indicators

The technical analysis field is filled with strategies that tell you where to buy and when to sell to make a profit in the Forex market. The conventional wisdom says that indicators help traders to make the right trading decision. This is true to some extent, but it should be viewed only as a general rule and not a rule of thumb. While using indicators helps one to keep on the right side of things, it should be known that trading is not simply a straight line, and there are other things that influence the market as well. When it comes to technical analysis, traders can use either technical indicators or technical trading strategies. Technical indicators are preferred by retail traders, as most of these are looking to profit from the quick swings the market makes. To be more exact, they are scalpers (taking many positions daily for short-term oriented profits). These traders use technical indicators as the supreme tool in their decision-making process.

What Are Trend Indicators?

Any Forex trading platform offers a bunch of technical indicators, from simple to complex ones. They are generally split into two categories: trend indicators and oscillators. Trend indicators follow the trend, and, most of the time they are based on averages calculated from previous prices. They reflect the current trend and have multiple uses in Forex trading. One important characteristic of trend indicators is that they are applied on the actual prices on the chart, and this makes them extremely visible. In other words, if you’re using a trend indicator for your trading decision-making process, it is impossible to miss when the trend is starting if you are disciplined.

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Where to Find Them

The MetaTrader has some trend indicators included in the default settings, and the path to finding them is easy. Just go to the Insert tab, chose the Indicators tab, and from that list select the Trend option. The ones that appear are those listed as default, but it doesn’t mean that these are all the trend indicators one can find on MetaTrader. Custom indicators can be imported onto the trading platform as long as they exist on the main computer.
Trend Indicators - 1
Other trading platforms such as JForex or cTrader have them categorised a bit differently, but the idea is the same: These are indicators that are applied to the actual prices on a chart. This is a big difference when compared with oscillators.

The Most Important Trend Indicators

In this part of our project, we will just for now mention the most important trend indicators, as later we will have a specific article dedicated to exactly how traders use them. We’re also going to list their advantages and disadvantages, as well as ranking them based on their importance and popularity. As can be seen on the chart above, under the Trend tab, there is a list of seven trend indicators. Before discussing them, it should be mentioned that this is not a ranking, and they are not listed based on their importance or indeed anything else; there is no order there whatsoever.

The most popular one is the Moving Average indicator. Every trader in this world knows what a Moving Average indicator is and what the implications are when these averages are reached. There are several ways to trade with a moving average, and, depending on the settings, there are new concepts to be interpreted. Such concepts will be the object of different articles here on the Trading Academy project.

Next in line is the Bollinger Bands indicator. This indicator is named after the man who invented it, John Bollinger. It is formed of three lines (in some cases only two) and the price stays confined between the upper and lower lines most of the time. The formula is quite a complex one, but is still based on historical prices. Depending on the number of candles the indicator takes into consideration, the resulting channel changes. Beware that this is not a regular channel, but one that adapts to currency prices as well.

The Ichimoku Kinko Hyo is quite an indicator. Some trading platforms such as the MetaTrader list it as a trend indicator, but other platforms refer to it as an oscillator. In both cases, the set-ups and the interpretation are the same. This indicator is a complicated one, in the sense that it has multiple averages on the screen, a cloud, and the interpretation is a confusing one. Nevertheless, it is a powerful tool for tracking trends, and comes from the Japanese technical analysis branch. Trend watchers are always aware where the Ichimoku cloud is and what the implications for future prices are.

How to Trade with Trend Indicators

There are different ways to trade with these indicators. Some of them even have the potential to spot reversals, such as the Ichimoku cloud, for example. The typical approach is to try to use them for entering/re-entering a trend that has already started. There is a saying that “The trend is your friend,” and it should be known by all traders. It is indeed true, and the general trading should be in the direction of a trend. If the trend is on a longer timeframe, such as on the daily chart and longer, then the longer the timeframe, the longer the trend will last. Traders who caught the move from the start will want to add to their position, but not at all costs: They want to find a dip to buy (in a bullish trend) or a spike to sell (in a bearish trend). To do that, trend indicators are used. On the other hand, traders who missed the start of the trend want to join the party as well. They’re not going to enter at just any place, but they’ll look to join the trend on any pullback (in a bullish trend) or spike higher (in a bearish trend). The two situations reflect the definition of a trend indicator, and this is how they are used. Not all trend indicators are applied on the actual prices, though; for example, the Average Directional Movement Index (ADMI) is not. However, the way the lines are interpreted shows the start or end of a trend, and therefore the indicator is categorised as a trend indicator; and this is all that matters: its interpretation.

Moving forward, the next article will deal with what oscillators are, and why they are even more popular than trend indicators. From this point on, our project will become more and more interesting, as technical factors will lead to an impressive set-up for profiting from the Forex market’s swings.

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