Forex trend strength indicator. The trend strength indicator is an objective way of assessing the market and forecasting further movement Forex trend direction indicators
The key task of any trader is to correctly assess the direction and strength of the trend. There is no single correct solution to this problem, and there are several reasons for this: firstly, traders trade on different timeframes, and secondly, traders always subjectively understand signals. However, regardless of the duration of the transaction, you have to use trend indicators.
Indicators trend(trend-following) allow you to identify the real price trend and determine its strength. Contrary to popular belief, the concepts of “trend indicators” and “trend indicators” are not identical: trend indicators are a subclass of a larger group, which also includes trend oscillators, which allow solving completely different problems (identifying resistance and support levels).
Moving average as a basic indicator
Most trend indicators are based on moving averages. We will not dwell on how moving averages are calculated - this article is devoted to this. The moving average is considered the easiest way to identify a trend - a number of well-known traders claim that this indicator alone is sufficient for successful trading. It is recommended to choose Fibonacci numbers (14, 50, 100) as a period for successful trading. The more periods, the smoother the average will look:
In the figure, the yellow average is the longest - it is noticeable that it is less dynamic. If a moving average is used alone, the direction of the trend is determined by its slope, and the strength is determined by its angle of inclination. In this case, the moving average line itself is taken as a support or resistance level.
It is also appropriate to use two average lines simultaneously with different periods:
In this case, the trend is judged by the reversal of the averages in one direction, and the entry point is chosen at the intersection of two moving averages (indicated by the arrow in the figure). In this case, the choice of moving average periods for such a combination rests entirely with the trader - the figure combines 14 and 34-period indicators. There are others - you can read about this in the article.
Using moving averages as a trend indicator has both advantages and disadvantages. The main advantage is simplicity: moving averages are the oldest indicator, having been used since the 60s. The simplicity of the calculations made it possible to build averages manually, without a computer. There are also disadvantages: firstly, moving averages are considered a lagging indicator, they are characterized by sharp fluctuations, and secondly, when trading in a “sluggish” market, they give an unacceptable number of false signals.
MACD trend indicator
Among other trend indicators, MACD (or Moving Average Convergence / Divergence). This indicator was invented in the 70s and is a histogram constructed from the difference between fast and slow exponential moving averages, with a signal line on top (which is also a moving average, but simple). MACD allows you to determine not only the direction, but also the strength (or slowdown) of the trend. This indicator looks like this:
For the MACD indicator, the standard values are 26 (for slow EMA), 12 (for fast EMA) and 9 (for signal line). The calculation is simple (for a computer): the 12-period average is subtracted from the 26-period average, and the result is smoothed by the 9-period average.
There are several ways to trade using MACD:
- 1. Open a position when the histogram crosses the zero mark.
However, many well-known traders are somewhat skeptical about this method, because, firstly, there are many false signals (for example, the last one in the figure), and secondly, the trader succeeds only in the middle of the trend.
- 2. Open a position when the signal line crosses the histogram.
If the signal line crosses the histogram from top to bottom (as in the figure), you need to open a long position. Based on the example given, we can conclude that this method is very effective.
- 3. . When the direction of the histogram and the direction of the price chart diverge, this indicates an impending trend change:
The MACD indicator also has pros and cons. The advantage is the accuracy that comes from using two different-period exponential averages at once, and the disadvantage is the same as for the moving average - the indicator is lagging, so it allows you to enter the trend only from the middle, and in case of a flat it is almost unusable.
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As you know, the price cannot move only in a straight line, it is characterized by sharp movements, followed by rollbacks, and most of the time the market is in a flat. Therefore, many are interested in the following questions: “How to determine a trend?”, “What is the strength of the current trend?”, “How to determine a trend reversal?” Professional players can analyze charts in a few seconds and tell what the current trend is without using indicators. But for beginners in Forex it can be difficult to say with absolute certainty what the current trend is - upward or downward. We will talk about this in this article, and also analyze in detail the various ways to determine the trend. See also what are there and what are their advantages and disadvantages from classical trading using the MT4 trading platform.
The first way to determine a trend is visual
5. RSI
The RSI indicator can also be used to determine the trend and its strength. If it falls below 30, then purchases should be considered. When the indicator reaches 70, you need to look for sell signals. In addition, the RSI indicator, like the MACD, is used to search for turning points on the chart using the divergence method.
In addition to the trend direction indicators listed above, there are other indicators that can be separately downloaded and installed on your MT4 trading terminal.
Forex trend strength indicators
Having decided on the direction of the trend, you need to understand what strength it has, so that you don’t get into a situation where you jump into the last carriage of the train when it comes to a complete stop. To prevent this from happening, you can use ADX, a Forex trend strength indicator built into MT4. It helps determine the direction and strength of a trend at its very beginning. At first glance, the ADX indicator seems a little complex, but by understanding how it works, you can significantly improve the profitability of your strategy. Many people confuse ADX with an oscillator, buying or selling at the borders of the indicator window. These are not oversold or overbought zones, but indicators of the state of the market. If the ADX value is below 20, then the market is in a flat, and it is not recommended to open new positions. When the ADX solid line is in the range of 20-25, this is the best time to open trades, you can capture 2/3 of the new trend. If the ADX solid line is above 50, then you should not enter the market; the strength of the trend will soon dry up. The direction of the trend can be judged based on the intersection of the dotted lines. So, if the pink dotted line (bearish strength) crosses the green dotted line (bullish strength) from bottom to top, sales can be considered.
Now you know how to determine a trend and its strength. You should not apply the acquired knowledge as a separate strategy; it will not bring much profit. But in combination with your trading system, determining the direction and strength of a trend will help you significantly improve your trading performance.
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