By Dragan Lukic
Trend trading focuses on a current trend taking place on which we jump on and ride until it is exhausted. Strategies aimed at this style of trading use the market’s momentum to take them higher or lower, depending on trend direction. Whilst there are tons of trend strategies available, in this article we will focus on the actual indicators that should be used when trading trends.
The bands are amongst the widest used and most well known indicators out there. Developed by John Bollinger in the 80’s, their purpose is quite clear – to measure volatility. The way in which we know the level of volatility is by looking at the width of the bands. High volatility is defined by widening of the bands while low volatility is defined by contraction of the bands. When trends take place, it is almost certain that the bands will widen out as volatility increases and this is when we should look into riding the trend. If we get into the trend early the bands will continue to expand meaning that we will stay in the trend for a longer period of time. Once we start to see contraction of the bands, stops need to be put in place in case the trend has come to an end. However, expansion may occur once again so we must not exit the trade unless we are stopped out. This will help our winners go even further.
Whether we use simple or exponential moving averages, they are a great tool when it comes to trend trading. The reason why is because they focus on the closing price for a set number of periods. As you might have already noticed throughout Forex training, the average of a certain trading period provides a great indication of the current price situation i.e. if the prices are stalling, rising or falling. Majority of traders use a two average cross-over as an indicator that a new trend is about to begin. Some use a close above the average line as an indication to buy and a close under it as an indication to fall. Whatever the strategy is, moving averages cannot be ignored because of the powerful line indicator that they produce.
This indicator is one of the simplest ones to use. There does not seem to be a lot of literature about this indicator but its effectiveness is on par with the above two. The aim of the momentum indicator is to indicate in which direction the trend is likely to head into it. It has a middle line from which we take our readings from. If the line is crossed over the trend tends to be rising. If it is crossed under, the trend tends to be falling.
All the above indicators have to be used in conjunction with strategies learned in Forex training. Using them on their own with no reference to the chart is a sure way to exhaust your trading capital. Indicator readings are not strategies themselves and they do not work on their own.
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About the Author
Dragan Lukic is a professional trader with years of Forex training experience. He also a financial blogger with hundreds of articles published on major financial websites. He is always open to discuss any of his articles so if you have a comment or a question please free to get in touch.