In technical analysis, we study charts to interpret the price action. These studies help us to decide our future course of trading actions, whether to initiate entry, exit or stay put in stock. There are many indicators. We have volatility indicators, trend indicators or oscillating indicators. Some indicators perform specific functions and some are used to identify various price actions. Traders also create their own trading system by combining different types of Indicators.
In this article, we will study various trend indicators, indicators that help us to study and recognize primarily price trends. Listed below are some popular trend indicators.
List of 11 Trend Indicators a Trader Must Use:
Moving Average (MA)
This is probably the oldest and very simple type of basic indicator. This indicator smoothens out the price fluctuations. It is represented by a single curved line projected over the price chart. It moves along the price candlestick/ bar, represented by a single line. We can see that the daily open, high, low, and close prices are not there. The MA or SMA (simple moving average) is computed by averaging the closing price (usually) of a specific period price. Mostly it is a 14-period moving average. But a 5-period, 20-period, 50-period, 100-period and 200-period are also very common.
When the MA is calculated by taking the daily closing prices of specific days and averaging them, we call it the DMA or daily moving average. The 50 DMA, 100 DMA and 200 DMA lines are in common use in charts. These lines tend to create support or resistance in price charts.
The MA is used to understand trends by observing the slope of the moving average line. Traders often use moving average crossovers to understand the short-term trend. The moving average crossovers are also used for entry and exit trades.
For crossovers, generally, two to three moving average parameters are used. Here in this chart of Nifty 50, I have used the 50 MA (red line), 100 MA (blue line) and 200 MA (green line) parameters.
Moving averages have multiple uses and can be modified according to the requirement of the traders.
Read more: Complete Guide on Moving Averages
The Supertrend is one of the most favored trend indicators. It works very well when the market is trending. It is also known to provide good entry and exit signals under specific conditions.
By default, the Supertrend is made on a 10, 3 factor. The 10 is the previous 10 periods ATR (Average True Range). It is the average of the last 10 periods’ true highs and lows. The 3 is the multiplier. The 10-period ATR is multiplied by 3 three to provide the volatility of stock price movement.
Many traders use different factors as per their individual choice. Besides giving buy signals and sell signals, as the name suggests, the Supertrend is a very powerful trend indicator. In addition to this. this indicator also provides trailing stop losses. The trend traders find it very useful for setting up their trades.
The chart of Nifty 50 shows a Supertrend indicator plotted on it. When a candlestick closes above the Supertrend line, the Supertrend turns green giving a buy signal.
And whenever the price candlestick closes below the Supertrend line, the indicator turns red giving a sell signal. Once the trend is set, it continues for a while, as we can see from the chart. During a trend, the Supertrend line acts as a trailing stop indicator. And when the trend changes the trader will exit from an earlier trade. Thus we can have trends, entry, exit and trailing stop from one indicator.
The Supertrend has many modifications and several uses to a trader. Some traders find the 15-period Supertrend chart to be very efficient and accurate. Some other traders want to use the 50 or 200 MA indicator along with Supertrend. We will get to know them when we study this indicator later in detail.
On Balance Volume
The On Balance Volume (OBV) is both a trend and a volume indicator. It indicates where the smart money is going. It relates price changes to the volume. It is a running total of volume. It shows whether the volume is flowing into the security or flowing out of it.
When the security closes higher than the opening price, the volume is added and is considered up the volume. Similarly, if the price closes lower, the volume is down volume which is subtracted.
The OBV precedes price changes. A rising OBV confirms the uptrend. Similarly, a falling OBV confirms a downtrend.
The OBV also has various other uses besides just confirming the trend. It also helps traders to initiate positions. An OBV upside breakout indicates buying the stock. Whereas, in case of a downside breakout, the investor should sell or create a short position.
Exponential Moving Average (EMA)
The EMA or the Exponential Moving Average is a modification of the basic M moving Average (MA). The basic difference is that, instead of giving equal weightage to all days of past and present, as in the case of MA, the EMA gives more weightage to the current price changes.
Giving more weightage to recent price data makes the EMA more responsive to recent price movements. This property makes the EMA more acceptable to traders.
When used in conjunction with other indicators, the EMA and EMA crossovers give important trade signals. For short-term trades, a 12 EMA and a 26 EMA is used together in general. For long-time trades, the 50 EMA and the 200 EMA are more commonly used.
Look at the chart above. We can see two EMAs have been used. They are 50 EMA and 200 EMA. This is a long-term chart. We can see how effective the crossover points are. They have been marked. Traders can easily identify the trend, and use the crossover for trade entry and exits.
This is a useful and popular trend indicator. It highlights the trend in which the price is moving. It is represented by bright dots placed above or below the candlestick. A trader can get multiple information from the Parabolic SAR or PSAR. The name is extracted from Parabolic Stop And Reversal. But it is known for its short form.
As the name suggests, this indicator also provides information on price reversal besides being a trend indicator. When the dot is below the price, the stock is in a bullish trend. When the price goes below the PSAR dots, the stock turns bearish. When dots change position price reverses. Also if the price breaks the dot position, it is time to exit the trade. Thus, Parabolic SAR gives good trailing stop for an existing trade.
Volume Price Trend Indicator (VPT)
The name of the indicator tells us that the Volume Price Trend (VPT) indicator is a trend indicator that also identifies the strength of price change through volume analysis. It is very similar to the On Balance Volume indicator.
If the price goes up with increasing VPT it supports the trend. Similarly, if VPT goes down with the price coming down, it supports the trend. If price action and VPT don’t agree with each other, we can have negative and positive divergences.
ADX: The Trend Strength Indicator
The Average Directional Index (ADX) is a trend strength indicator. The ADX quantifies the price velocity. The ADX parameters shown below show how the trend strength is quantified in this indicator.
The chart above shows the trend strength scale. Irrespective of trend direction, the ADX shows trend strength. It is believed that when ADX moves over 50 from below, it is time to enter the trade if the market favors the trader’s call.
The ADx has three components, the ADX line, the positive directional indicator (+DI) and the negative directional indicator (-DI). The ADX has multiple uses all of which will be discussed later. The ADX indicator also uses a histogram that shows green bars for up moves and negative bars for down moves.
We also use crossover and divergences for trading signals. It is very popular to traders due to its capacity to generate multiple signals.
The TRIX indicator is nothing but a modified exponential moving average indicator. It is known as triple exponential moving average or TRIX. It shows the percentage of change in the moving average which has been exponentially smoothed three times. Resultingly we get a single line that clearly shows the trend.
The TRIX is designed in such a way that it can filter out the negligible price movement or noise that creates noise and hamper trend interpretation.
This indicator shows the overbought /oversold position. Also, traders find trade entry or exit signals when the indicator crosses the zero line.
The Bollinger Bands are a very useful technical indicator. It finds trends in a unique way. Bollinger Bands (BB) have multiple uses and help traders to find overbought and oversold zones, breakouts and reversals and also trends.
The idea of standard deviation is used to create Bollinger Bands. By default, a 20-period simple moving average is used to calculate the mean or the middle line. A +2 standard deviation value is added to the mean value to find the upper band. To find the lower band, -2 standard deviation value is subtracted from the mean value. Thus we have Billinger Bands that has one middle line or the median, one upper band and a lower band at +/- 2 standard deviation.
From the slope, we can see the overall trend as seen in this chart. It is advised to take buy or sell trades in the direction of the trend. There’s a popular saying which says ‘Trend is the only friend’. So if the trend is bearish take only the sell calls and if the trend is positive, take only the buy calls. In this chart, we can see the Bollinger Bands have one middle line, the median and one upper and one lower band.
Traders can make out various trading signals from Bollinger Bands.
Advance-Decline Line (ADL)
This is a technical indicator that is used to find trends. From the name, it is evident that this indicator uses advancing and declining stocks to find the trend. In fact, it plots the result obtained by subtracting the number of declining stocks from the number of advancing stocks in a daily basis of an index or a group of stocks. This is a cumulative number represented by a single curved line.
When the price goes up with ADL moving upwards the trend is bullish. When the price come down with ADL coming down too, the trend is bearish.
When the ADL line doesn’t agree with price movement, divergence occurs. We can have positive or negative divergences.
The Ichimoku cloud is a technical indicator that shows price trends, volatility, momentum, price reversal and much other information as well. It is what one may call – all in one indicator.
With all other information, it gives us information about the price trend. Therefore it is used for trend analysis. This indicator calculates multiple averages and plots them on the chart. The indicator many data points and creates a cloud using all the calculations. From this cloud, we can get information on future price projections and price reversals.
The Ichimoku cloud use five lines or calculations. These lines are a 9-period average, a 26-period average, an average of those two averages, a 52-period average and a lagging closing price line. Though it may seem complicated they are used in a simple and efficient way.
When the cloud moves up and the price moves up, the uptrend is strong. Similarly, when the price moves down and the cloud is also scaling down, the bearish trend is strong. When these two parameters don’t agree divergence occurs. Then we can find clues for price reversals.
Traders often use shaded areas of cloud as a zone of support/ resistance. Traders can use information obtained from the Ichimoku cloud in a number of ways.
The Ichimoku cloud is also known as Ichimoku Kinko Hyo. The five lines have different names also. The following chart describes them well.
The five lines are named as Tenken-Sen, Kijun-Sen, Chikou Span, Senkou Span A and Senkou Span B. Then do have multiple uses. The chart above explains in short. We will discuss this in detail later.
In addition to the indicators mentioned above, there are many other indicators classified under oscillators or volatility indicators that also show price trends accurately. Some of them are the Relative Strength Index (RSI), the Moving Average Convergence Divergence (MACD), the Stochastic Indicator and many other similar indicators, Their uses and applications will be discussed duly.