There are some indicators which are effective in trending markets, and they should be avoided in range markets due to their proclivity for producing misleading signals.
1. Moving Average
The simplest basic trend-following indicator is MA(Moving Average) . They simply divide the data from the most recent n-period (n-hour, n-day, etc.) by the n of the period to arrive at the indicator’s current value. The fundamental difference between exponential and simple moving averages is that the former gives the most weight to the most recent period, whilst the latter gives equal weight to each period (including the present). To put it another way, the exponential moving average is more sensitive to today’s price activity. In general, the longer a moving average’s period is, the slower it responds to market activity and the later its signals are.
Moving averages are straightforward, and their power and utility stem from this. One hundred-day moving average is an effective trend indicator in many circumstances, with the only negative being its lateness in signaling. However, the slowness has both a benefit and a drawback: while it is unlikely to warn us to trend changes fast, the signals it provides are more likely to be accurate. Even in the worst-case scenario, the moving average may be a useful tool for determining entry and exit points for a trade.
2. ADX
J. Welles Wilder, a trader, and mechanical engineer created this indicator in 1978. It compares the highs and lows of successive periods, naming them +DM and -DM, and calculating the indicator’s value based on the absolute difference between these values.
The indicator is used to determine how strong a trend is. The ADX has a range of values between 0 and 100, with a number below 20 indicating weakness and a value over 40 indicating that the trend is still strong. It may be used on this premise to assess if (but not when) a trader should enter a trend, as well as probable reversals when the indicator’s value is too low. The ADX is a lagging indicator, which means it will only assess a trend after it has already begun. The ADX is likely to generate many false signals in the absence of a trend, thus the trader should use other methods, like as trend lines or moving averages, to determine the presence of a trend before utilizing this indicator to determine its strength.
3. BOLL
In the 1980s, financial analyst John Bollinger conceived and developed Bollinger Bands. It comprises a moving average and two bands positioned at the moving average’s upper and lower borders.
When price movement extends beyond the upper or lower Bollinger bands, returns to the same, and then reverses and continues with the breakout, this is regarded to be a buy or sell signal. While a breakout from Bollinger Bands does indicate increased volatility and, as a result, a shift in trend, technical analysts have learned through time to look for confirmation of the breakout signal in the form of a return and reversal.
The Bollinger bands are a useful indication of volatility, in addition to being a strong sign for recognizing trend shifts (the speed and severity of price fluctuations). When price volatility is low, the bands contract, and when volatility is high, they widen. In this sense, the indicator can be used to determine whether current market conditions are suitable for a trader’s volatility tolerance. Bollinger Bands can be used to assess the situation if your trading style or leverage ratio prevents you from interacting with the markets during periods of extreme volatility.
4. SAR
Traders use the parabolic SAR indicator, created by J. Welles Wilder Jr., to predict trend direction and probable price reversals. To identify ideal departure and entry positions, the technical indicator employs a trailing stop and reverse approach known as “SAR,” or stop and reverse.
The indicator shows on a chart as a sequence of dots positioned above or below the price bars. A bullish indication is defined as a dot below the price. A dot above the price, on the other hand, indicates that the bears are in charge and that the trend is likely to continue lower. When the dots flip, it means a probable price direction shift is underway. If the dots are above the price, for example, and they flip below the price, it might indicate a price increase.
As a stock’s price climbs, the dots will rise with it, at first slowly, then gathering up the pace and speeding up with the trend. As the trend progresses, the SAR begins to move a bit quicker, and the dots quickly catch up to the price.
