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What you trade is what you see; how different indicators tell trend

In Forex, what you trade is what you see

Even in a single time frame, ‘what is trend?‘ can fetch many different answers as we can see here from a few commonly used trading indicators when overlaid with the AUDUSD currency pair. Which one to use? Depends on your trading plan with consideration also to the fact that trading indicators have settings which can be personalised. What works for me need not work for you.

 

MACD line and zero line determines trend

MACD is a momentum indicator derived from exponential moving average of prices. There are a few elements but what we are interested here is the MACD line and zero Line. When they intersect, trend changes. When MACD line is above zero, trend is up. When MACD line is below zero, trend is down.

In MACD, trend is indicated by the position of the MACD line in relation to the zero line.

In MACD, trend is indicated by the position of the MACD line in relation to the zero line.

 

Bollinger bands users read trend in 3 ways

Moving average in centre

Many people associate Bollinger bands with indicators that tell when prices are overbought, oversold. A moving average in the middle can be used to tell trend besides support and resistance. Loosely used, when the gradient of the line is pointing up and price is above, trend is up. When the gradient is down and price is below, trend is down.

The blue line in the middle is usually a simple moving average that helps users to visualise trend

The blue line in the middle is usually a simple moving average that helps users to visualise trend

 

Adding a second moving average

Some users incorporate another moving average with a higher period setting. When the shorter moving average cuts upwards across the longer moving average, a golden cross is created. This signals the beginning of the up trend. When the shorter cuts the longer from higher to lower, a death cross signals the start of a down trend.

The extra moving average serves to identify trend by intersecting to create golden cross and death cross

The extra moving average serves to identify trend by intersecting to create golden cross and death cross

 

Using the outer bands

Although the outer bands are associated with overbought-oversold by virtue that they indicate outliers, again it is a matter of perspective. Because the moment you realise that once price become fixated with the outside of those outer bands, they are no longer outliers but trending out-performers instead.

One is an outlier, many becomes a trend

One is an outlier, many becomes a trend

 

Moving averages create crosses to signal change of trend

Same concept as bollinger bands employing the additional moving average line. Used here are two exponential moving averages.

2 moving averages create the same intersection, crosses

2 moving averages create the same intersection, crosses

 

Commodity Channel Index or CCI uses the zero Line

Like MACD, the CCI users look at where CCI is in relation to its zero line. In this particular chart where I use a pretty low period setting of 14, too many signals are created. Without other indications, an individual trading signals here will be overcome shortly.

Commodity Channel Index uses the zero Line to determine trend

Commodity Channel Index uses the zero Line to determine trend

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Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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One thought on “What you trade is what you see; how different indicators tell trend”

  1. Soh Tiong Hum says:

    Note: The 3rd chart on Bollinger Bands uses the EURAUD pair for illustration instead.

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