The 5 Best Trend Indicators That Work

This is the most important thing before you can identify the direction of the trend. The answer is: Timeframe. A trend is meaningless without knowing your timeframe.

• Day traders are on the 30minutes timeframe and below

• Swing traders are on the 1 – 4-hour timeframe

• Position traders are on the 4-hour timeframe and above

Once youve defined your timeframe, focus on it 100% because the other timeframes are “noise” to your trading.

Next, lets look at the 5 trend indicators that work…

Trend Indicators #1: How to use Price Action and identify the direction of the trend

Price action refers to reading market structure, momentum, and sentiment to identify trading opportunities.

It‘s one of the most important things you can learn because it gives you a valuable insight of the market you’re trading (that may not be found on trading indicators).

For example:

Where will losing traders puke？

• Where are traders placing their stops？

• Where will new traders enter the market？

Now that you‘ve understood the importance of price action, let’s learn how to read it and identify the direction of the trend.

Here are 3 things to remember:

• An uptrend consists of higher highs and lows

• A downtrend consists of lower highs and lows

• A range is contained between the highs and lows

• Heres what I mean…

Uptrend:

Downtrend:

Range:

Sometimes its difficult to identify the direction of the trend based especially when the candlesticks are “flying” all over the place.

So in the next section, youll learn how to identify the direction of the trend without using candlestick charts.

Heres the thing: Candlestick charts can get messy if the wicks are long which makes it difficult to identify the trend (especially for new traders).

And a simple solution to it is: Line chart. Youre probably wondering:“What is a line chart？”

It shows the price on your chart by taking the price at the close and then connects the closing prices together via a line. So, youll see a squiggly line on your chart which makes it easier to identify the trend.

Heres what I mean:

Candlestick chart:

Line chart:

See the difference？ And heres how you can interpret line charts:

• If the line is pointing higher, its an uptrend

• If the line is pointing lower, its a downtrend

• If the line is flat, its a range

Simple stuff, right？

However, you must know that line chart only considers the closing price. This means you won‘t know what the high/low of the candle is — and this will hamper your trading decisions. A line chart is useful to identify the direction of the trend. But for precise entries, exits and trade management, it’s best to stick with candlestick or bar charts.

The moving average is an indicator that “summarizes” past prices and is plotted as a line on your chart. It‘s a lagging indicator but it doesn’t mean its useless because the moving average indicator can help you identify the direction of the trend — and the strength of it.

Heres a simple technique that works:

• If the price is above the 200MA, then its a long-term uptrend

• If the price is below the 200MA, then its a long-term downtrend

An example:

• How to use moving averages to identify the strength of the trend

  Besides the 200MA, you can use the shorter-term moving average to identify the strength of a trend.

• In a strong trend, the price tends to stay above the 20MA

• In a healthy trend, the price tends to stay above the 50MA

A few examples：

Now:

Moving average works best in trending markets (whether it‘s a strong, healthy, or weak trend). But if the market is in a range, the moving average has little significance and it’s best to ignore it.

A Trendline is a tool you draw on your charts. It can help you identify the direction and the strength of a trend. But before I get to it, you must learn how to draw trendlines the correct way.

How to draw trendlines like a pro

Heres 3-step technique:

• Look for at least 2 swing points (it could be a higher low or lower high)

• Connect the swing points using a trendline

• Get as many “touches” as possible on the trendline

An example:

Simple right？

How to identify a trend and the strength of it with trendlines

Heres how to interpret the trend:

• If the trendline is pointing higher, its an uptrend

If the trendline is pointing lower, its a downtrend

As a general rule:

• The steeper the trendline, the stronger the trend

• The flatter the trendline, the weaker the trend

  

Make sense？ Good. Now youve gotten a glimpse of how to use trendlines to define a trend.

In case you‘re wondering:“What’s a Channel？”A Channel is a variation of the Trendline. The way you draw and interpretation it is the same as Trendline. The only difference is… Channel has an extra line that‘s parallel to the Trendline. Here’s an example:

As you can see, channel helps you identify where opposing pressure could come in. This means you can take profit ahead of time — before the price has a high probability of reversal.

• If you look only at the water, youll miss the ocean.

• If you look only at the trees, youll miss the forest.

• If you look only at the current price, youll miss the long-term trend.

So whats my point？

Stop being fixated on what the market is doing each and every moment. Instead, zoom out your charts and see the big picture.

Zoom in view:

See how much of a difference it makes when youre looking at the big picture？

A mistake made by many traders is they become so involved in trying to catch the minor market swings that they miss the major price moves. —Jack Schwager

There are different ways to identify the trend and theres no right or wrong or best approach.

Hare the 2 things to ask :

I’ll use the 200-period MA to define the long-term trend.

If the price is above it, the market is likely to be in a long-term uptrend and I want to have a long bias.

If the price is below it, the market is possibly in a long-term downtrend and I want to have a short bias.

Not all trends are created equal.

After many years of trading, Ive realized most trends can be broken down into 1 of 3 categories:

• Strong trend

• A strong trend is when the price has little to no pullback and remains above the 20MA.

• In such a scenario, the pullback may never come as the price keeps breaking higher. Thus, in strong trending markets, the best entry is usually breakout trades.

An example:

• Healthy trend

A healthy trend is when the market has a healthy pullback and remains above the 50MA.

In such market conditions, its possible to trade the pullback. Possibly towards the 50MA or, previous Resistance turned Support (in an uptrend).

Weak trend

A weak trend is when the market has steep pullbacks but remains above the 200MA.

In such a scenario, you can trade from the 200MA or an area of Support (in an uptrend).

An example:

#1: Which timeframe should I use to identify the trend？

The timeframe should be relevant to your trading:

If you‘re a day trader, then you’ll identify the trend on the lower timeframe like the 1-hour or 30-minutes timeframe.

If you‘re a swing or position trader, then you’ll identify the trend on the daily or the weekly timeframe.

#2: Do I have to adjust the moving average settings to suit different timeframes？

There are no best settings out there because it depends on the type of trend that the market is in.

If the market is in a:

• Strong trend, it will tend to respect the 20 MA

• Healthy trend, it will tend to respect the 50 MA

• Weak trend, it will tend to respect the 200 MA

Personally, I‘ll use whichever of these 3 moving averages that the market is respecting more, for the timeframe I’m trading on.

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