Experienced traders say the first thing any trader should know about a market is the trend. Trend lines are the basic indicator of trend, of course, but they are quite subjective, depending on the eye of the beholder. A line that might fit one time frame may not be right for another time frame.
So analysts have refined technical indicators that can verify visible trend observations from a price chart. The goal is to identify three things:
- Direction of the trend. Trend traders want to have a position that is in line with the trend and need to know whether they are dealing with a trending or non-trending price pattern.
- Situations when a trend may be about to develop with a goal of getting onboard the new trend as early as possible.
- Times when a trend may be diminishing or ending so traders can exit before their trend-following profit evaporates.
Prices in many markets often jump back and forth from one time period to the next, but trending indicators smooth out price activity to reveal the trend of a market over time. This smoothing process can provide underlying insights about a market that will keep traders in a position through periods of market “noise” or may help them judge whether the noise is really forming a turning point in a market.
The most popular trending indicators include:
Moving Averages, which can be used alone or in a variety of combinations to identify trends and potential trend changes.
Directional Movement Index, which with the ADX indicator measures the “trendiness” of a market without regard to whether the trend is up or down.