Trend Trading: 4 Common Trend Indicators Every Trader Should Know

Cheat Code Staff

While no single technical indicator is guaranteed to make you money, certain strategies have proven themselves repeatedly using this 4 common trend indicators.

If you’re looking to ride the waves of the markets, trend trading may be for you! 

This type of trading involves analyzing an asset’s momentum in a particular direction and attempting to capture gains through that analysis. 

In this article, we’ll take a look at four of the most common indicators used by trend traders: 

  • Moving Averages
  • Moving Average Convergence Divergence (MACD)
  • Relative Strength Index (RSI) 
  • On-Balance-Volume (OBV)
technical indicators showing buy and sell positions
Image credit: fullertonmarkets.com

Moving Averages

Moving averages are a trend-following indicator that smooths out price action by creating a single flowing line. 

This line represents the average closing price of a security over a set period of time. 

The most popular timeframes for moving averages are the 200-day, 100-day, and 50-day for long-term investors. 

But it can be 20 minutes, 10 days, 30 weeks, or any time a trader chooses. 

The moving average angle can provide clues about the direction and strength of the underlying trend.

  • If the moving average is horizontal – it means that prices are consolidating, and there is no clear trend. 
  • If the moving average is angled up – prices are in an uptrend
  • If it is angled down, prices are in a downtrend

Crossovers occur when two different moving averages cross over each other

  • Bullish crossover occurs when a shorter timeframe moving average moves above a longer timeframe moving average.

    This indicates that prices are starting to rise and that momentum is increasing
  • Bearish crossover occurs when a shorter timeframe moving average moves below a longer timeframe moving average.

    This indicates that prices are starting to fall and momentum is decreasing

Moving averages can be used in various ways, but some common uses include identifying trends, monitoring momentum, and spotting potential reversals.

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence, or MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices

It is calculated by: 

Taking away the 26-day exponential moving average (EMA) from the 12-day EMA. 

On the other hand, a nine-day EMA of the MACD (referred to as the “signal line“) is then plotted on top of the MACD. 

The signal line is used as a trigger for buy and sell signals. 

MACD signals are generated when the fast MACD line crosses above or below the slow signal line

A buy signal occurs when the MACD crosses above the signal line, while a sell signal occurs when it crosses below the signal line.

The histogram is used to visually represent changes in momentum and can be used to generate early indications of a change in price direction.

Histogram bars extending above zero indicate positive momentum, while bars extending below zero indicate negative momentum. 

Thus, by monitoring the MACD and histogram, traders can identify changes in trend direction and gauge whether prices are likely to continue moving in that direction.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum indicator that measures the speed and change of price movements. 

The RSI ranges from 0 to 100, with readings below 30 indicating oversold conditions and readings above 70 indicating overbought conditions. 

Many traders use the RSI as a trend trading indicator to identify when a security is becoming overbought or oversold.

For example,

If the RSI is rising along with the price of a security, it may be an indication that the security is in an uptrend. 

Conversely, if the RSI is falling while the price of a security is unchanged or rising, it may indicate that the security is in a downtrend

In addition, some traders look for divergences between the RSI and the price of a security as potential trade signals.

A bullish divergence occurs when the RSI forms higher lows while the price forms lower lows. 

This may indicate that the underlying security is about to embark on an uptrend

Similarly, a bearish divergence occurs when the RSI forms lower highs while the price forms higher highs. This may indicate that the underlying security is about to begin a downtrend.

On-Balance-Volume (OBV)

obv (on balance volume) illustration with labels
Image credit: asktraders.com

On-Balance-Volume (OBV) is a technical analysis tool that uses volume data to predict future price movements. 

OBV is calculated by 

Adding the day’s volume to a running total if the price closes higher than the previous day and subtracting the volume if the price closes lower. 

This running total is then plotted on a chart, and traders look for divergences between OBV and price to predict future price movements.

For example, if the price of a security is rising but OBV is falling, this may indicate that the rally is losing steam and that a sell-off is likely. 

Conversely, if the price is falling, but OBV is rising, this could be a sign that the downtrend is about to reverse. 

While OBV is not a perfect indicator; it can be a helpful tool for trend traders looking for clues about where the market may be headed next.

The Bottom Line

The four indicators that we’ve looked at in this blog post are just a few of the many options available to traders. 

As always, it’s important to do your research before implementing any indicator into your trading strategy. 

And remember, practice makes perfect
Start by paper trading with fake money and then move on to live trading when you feel comfortable.

TAGGED: ,
Share This Article
Leave a comment