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How to work with the best trend indicators
What is the trend? In fact, it can be represented as a definite direction for changing quotes. Those. it can be either downward (in cases where the cost falls) or upward (when the cost increases). Looking for trends in the market is the main principle of working with indicators of this kind.
In general, we can say that these are great tools that are one hundred percent able to cope with the task. But they also have a significant drawback complicating the life of the trader - they are late and the trend can only be seen in development.
The construction of most of the indicators takes place in the same place as the construction of the price chart. They are also curves that are either below or above. Moving average is the most important of the indicators, it is the basis for most technical analysis algorithms. From the name it becomes clear that this indicator is a derivative of average prices for a specific period of time. The longer the period of time we consider, the smoother the curve will be. If we take a short period of time, the curve will more clearly and flexibly respond to changes in the market, while giving a relatively large number of false signals.
Trend indicators: advantages and disadvantages
First consider the positive aspects of such algorithms.
- With their help, you can identify the current trend. Using it, you will quickly understand the current situation on the market.
- The greater variability and flexibility of the settings allows you to make the results more accurate.
- Ability to use with oscillators in the form of filters.
Like any other indicators, in addition to advantages, there are also disadvantages. Namely:
- Although these indicators reflect the current state of affairs and how the current trend is developing, it is impossible to determine its completion from them. If such signals are still able to be counted, then this happens too late.
- Despite the variability and flexibility of the settings, it was not yet found a middle ground that would quickly screen out false signals. Therefore, the trader will have to independently install additional filters in order to filter out incorrect data.
There are four types of trend indicators that are most often used in the work. Now we consider each of them.
No. 1 - Moving Averages
The most common type, based on which are many other indicators that allow you to accurately calculate market trends. Also called ma. For the construction, the average costs for a specific period of time are used. As is already clear from the description, the indicator itself works with only one setting - the period.
The smaller the period of time we take, the more flexible the moving averages, on which false signals begin to appear. The indicator will be smoothed with an increase in the period. In addition, in this case, the situation with trends will be displayed with a delay.
The indicator can be used independently, but more often MAs are taken in conjunction with other tools, or with another MA (reflecting the situation over a different period of time). In such a case, intersecting the MA lines will display market signals.
№2 - Bollinger Bands
Indicator based on MA. The cost will be located within the range formed by the curves of the algorithm. Going beyond the limits is possible, but such situations practically do not occur. It is possible to arrange the curves on the indicator in such a way because they are slightly shifted from the moving average time (and back and forth). With the help of Bollier bands, you can see not only the trend itself, but also what the situation in the market is. It displays volatility (as it expands or contracts), and this information can also be applied in the trading system.
- Output prices beyond the "envelope" - the main data that can be retrieved using the Bollinger bands.
A long position appears when the signal is detected from below. In those cases when the signal is detected from above, this will indicate the opening of a short position.
№3 - ADX Indicator
It can also be attributed to trend indicators, even though it will not reflect the direction, but the strength of the trend. To build it, create a separate window and use the curves ADX, + D and –D. Using the last two curves, you can get a display of the current market situation. With ADX, trend strength is displayed. Sometimes this data can be confusing, especially for newcomers to the industry, who are trying to find out the direction of the trend using an indicator. It is better to leave such attempts, because the results will be negative.
The rise of ADX shows that there is a trend in the market (its direction is not indicated, so it can be both downward and upward). The fall of ADX indicates a trend decay.
№4 - B. Williams Alligator
From the name it becomes clear that the indicator was developed by Bill Williams. It consists of MA, taken for specific periods. With the greatest accuracy and correctness displays what is happening when used in the system of its developer, but if it is used separately, it also works.
The author of the algorithm indicated that the indicator goes through a couple of stages:
- Hibernation mode. At this time, the curves are located side by side, and the oscillations are so miserable that they are almost not noticeable. There is no trend.
- Awakening. But in those moments when the curves come into motion - this indicates the start of the development of the trend.
The curves, going up, indicate an uptrend, and downwards, respectively, a descending one. It is important that the lines are located in a specific order.