Moving average, bollinger bands, average true range, average directional movement index, these indicators are used to measure the strength and direction of a trend. As the name implies, they are very useful in trending markets, and their use in many markets because of the tendency to give false signals are avoided.
The significance of trends is an accepted fact for many years, and used by all methods of technical analysis, trend following gave his disciples the greatest gains over the years. Before starting the review of indicators in detail, let us first try to understand the reasons for the success of the method of trend following.
Trend follows the simple identification of a trend (preferably long term), and maintaining positions in harmony with it, without much consideration for other sources of technical data or analysis. This does not mean that trend-following requires that we know nothing, but the trend line, but it suggests that the dealer has a high value on the trend, once identified and minimized the effects of other concerns, if they are not very convincing (for Sun, we do not know most of the resistance line short or medium term, but we will not disregard a powerful line of resistance multi-year). With this method, the dealers are trying to buy or sell depending on the direction of the trend when the trend line will be affected by the price action.
Why is this method so successful? Because the major economic changes and long-term fundamentals of the events, and follows the trend (which is only another name for the big picture, or the scenario depicted by this fundamental), the merchant to focus only on drivers most significant economic time. Trends for long, because the economic events to reinforce often, and the connection itself reinforced (eg the impact of interest rate cuts by bank loans and loans increasing further leads to more jobs, which leads to greater economic activity, which leads to more loans and so on and so on), and the trend follower is simply recognition of the results of this powerful force powers, while it may not be aware of their causes.
The best way is to identify trends, they confirmed their support for fundamental factors. If the dealer is not willing to maintain this healthy practice, it can use to develop indicators of technical analysis to identify trends in their early or middle stages of their development. We should take the risk of many trends in air bubbles in the final phase of developing the caution, and it might be a good idea to avoid late registration, unless we know what we do.
We are now a number of different types of indicators to identify and evaluate various trends.
Moving average
Moving averages are the simplest type of trend following indicators. You simply take the data of the last n (n-hours, n-day, and so on), divide by n for the period of the indicator of the current value. The main difference between exponential and simple moving averages is that while the former attaches great importance to the more recent period, it each time (including today) weighs the same. In other words, the sensitivity exponential moving average of the price action today. In general, the longer moving average reacts more slowly to price action, and later its signals.
Moving averages are simple, and its strength lies in its simplicity and usefulness. In many cases, an average of 100 days in motion is an excellent barometer in his, with its one drawback is its slowness to give signals. But the slowness is as much an advantage as it is a disadvantage: While it is unlikely that we will change the trend quickly the warning signs are there are probably more reliable. Even in the worst case, the moving average is a good reference point and a reliable indicator for the establishment of entry / exit points of negotiation.
Beginners can easily follow a long-term moving average trend line than his.
Bollinger Bands
This indicator was invented and developed by John Bollinger, a financial analyst in the 1980s. It consists of a moving average, and placed two strips on the upper and lower limits of the moving average.
A signal to buy or sell is supposed to be generated if the price action goes beyond the Bollinger bands up or down, back to even, then returns and goes to the epidemic. At the outbreak of Bollinger bands indicates volatility increases, and therefore a change in the trend, knowing from experience over the years, technical analysts, to seek confirmation of an outbreak signal a return and repentance.
Apart from the conviction that it is a good indicator to identify the trend reverses, Bollinger Bands are an indicator of volatility (the speed and severity of price fluctuations). Bands, price action meet the public when volatility is low, and expand when it is high. In this sense, the indicator can be used to determine whether current conditions in a market adapted to the volatility of tolerance are a dealer. If your trading style or debt ratio does not allow you to interact with the markets in periods of high volatility, Bollinger bands, you can use to assess the situation. Of course, it is important to keep in mind that the indicator shows the current volatility without telling us much about the future of computing.
ADX
This indicator was developed by J. Welles Wilder, a merchant and a mechanical engineer in 1978. He compared the heights and depths of successive periods, it calls + DM and-DM, and the absolute difference between these values, it reaches the value of the indicator.
The indicator is used to assess the strength of a trend. The final value of ADX is valid between 0 and 100, and a reading below 20 as a sign of weakness, while a value above 40 indicates that the trend continues unabated. On this basis, can be used to determine whether (not if) the merchant must join a trend, and also possible setbacks, if the indicator value is too low. The ADX is a lagging indicator, and by definition, is to assess only a trend, if it is already on track. In the absence of a trend of the ADX is required to give many false signals, and the dealer must use other methods such as trend lines or moving averages, to determine the existence of a trend before you measure this indicator of their strength.
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