In the Forex market, trend indicators work in both bearish and bullish markets as traders can benefit from both types of markets. Quite naturally there are many trend indicators that have been used extensively by traders around the world. It should be noted that these strategies using trend indicators only work in markets with trends.
The Bollinger bands indicator is regarded as one of the most famous trend indicators used by traders, especially by retail traders. The inventor, John Bollinger, had two uses for it when he developed the indicator: To measure the market’s volatility and to show trending conditions.
Bollinger Bands consist of three bands that closely follow the price, with a band in the middle being a moving average such as the EMA. The bands follow the price and reflect the volatility as well. Volatility is said to be going lower as the bands get closer, signalling that a breakout is imminent.
2ADX or Average Directional Movement Index:
The ADX trend indicator is used to measure the strength of a trend, a key piece of information to almost all traders. During strong bullish conditions, traders may decide on skip selling at resistance, hoping that the price might go through it if the trend is strong. However, buying into support may not be wise for a trader during strong bearish trends.
In such a situation, traders can get confidence in choosing what action to take if they know the strength of a trend. They may skip the trade when the trend doesn’t confirm a trade, even though all other things point towards it. The ADX usually shows a value between 0 and 100. When above 40, trend indicators may provide the right entry for a trade. When below 20, it is indicative of weak trading conditions.
Developed by Wilder in the 1980s, the Parabolic SAR is a popular trend-following indicator. Like many other indicators, the Parabolic SAR also lags the price action. However, during strong trends, its stop and reverse functions are helpful in notifying traders that a new trend is clearly in place.
The Parabolic SAR can calculate future values based on historical ones. Traders also use it to set an appropriate stop loss in a trade. As the Parabolic SAR remains on the chart after signalling a bearish or bullish condition, traders use this as an invalidation of the previous trend. They thus use it to trade short-term as the market rarely forms strong trends.
The 200 period Moving Average or the MA(200) is considered as the “mother of all moving averages”. There are multiple ways for a trader to deal with trends when using the MA(200). Traders can buy dips in a bullish trend or sell spikes in a bearish trend. Traders can also interpret multiple moving averages or various periods and look for their perfect order from fastest to slowest.
Additionally, traders can sell spikes after a death cross between MA(200) and the MA(50) and buy dips after a golden cross.
5Moving Average Convergence Divergence:
The Moving Average Convergence Divergence or MACD has a strong trending component, even though it is listed as an oscillator on most trading platforms. The MACD consists of a histogram that can show the nature of any current trend in the market, making it one of the most powerful trending tools. Traders should use the histogram against the MACD line. The histogram tends to stay below the MACD line in a bullish trend. Thus traders should exit when the histogram crosses above the MACD as it may indicate a possible bullish reversal.
6The Aroon Indicator:
The Aroon Indicator is one of the lesser-known but powerful trend indicators in existence. Built by Tushar Chande in 1995, it is mainly used for identifying changes in the underlying trend. It is unlike other trend indicators It consists of two lines and appears at the bottom of a chart. It works only on the daily timeframe.
The Aroon indicator measures the changes and the strength of any trend in a separate window like an oscillator. Traders can use it as a confirmation to a trend’s strength. The two lines the Aroon indicator is made up of are conveniently named Aroon up and Aroon down. The market is said to be in a bullish trend when “Aroon up” crosses above the “Aroon down” line. A bearish trend begins when the reverse happens.
The Donchian Channel is considered a unique channel that reinforces trending conditions. Developed by Richard Donchian, it is a trend indicator that helps users identify trends. Trading with the Donchian Channel can be both simple as well as complex. It is generally advisable for traders to sell when the price reaches the lower edge of the channel, and buy when it reaches the upper edge.
However, the major drawback of this indicator is that it wasn’t originally developed for the currency market.
Trend indicators gained popularity with the emergence and expansion of online trading which provided traders around the world, access to technical market indicators. Thus, they have been applied to any given chat by almost all online traders.
However, it should also be known that most of the above indicators were developed before the emergence of trading in the currency market, as we know it today. Almost all technical indicators lag in price action. This is quite a challenge for traders to smooth the price action in a way to allow the trend indicator to reflect accurate changes in price.
For instance, Bollinger bands tend to work best if the traders using the middle Bollinger band, also uses an EMA instead of the implied Simple moving average. Thus, even though trend indicators lag in price action, it can help traders ride important trends. Traders can make up for previous mistakes that have affected their trading account, by riding a trend on the daily timeframe.