Trend traders attempt to isolate and extract profit from trends. There are multiple ways to do this. No single indicator will punch your ticket to market riches, as trading involves other factors such as risk management and trading psychology as well. But certain indicators have stood the test of time and remain popular amongst trend traders. Here we provide general guidelines and prospective strategies are provided for each; use these or tweak them to create your own personal strategy. (For more in-depth info, see "Trading Volatile Stocks with Technical Indicators.")

Moving Averages

Moving averages "smooth" price data by creating a single flowing line. The line represents the average price over a period of time. Which moving average the trader decides to use is determined by the time frame on which he/she trades. For investors and long-term trend followers, the 200-day, 100-day and 50-day simple moving average are popular choices.

There are several ways to utilize the moving average. The first is to look at the angle of the moving average. If it is mostly moving horizontally for an extended amount of time, then the price isn't trending, it is ranging. If it is angled up, an uptrend is underway. Moving averages don't predict though; they simply show what the price is doing on average over a period of time.

Crossovers are another way to utilize moving averages. By plotting both a 200-day and 50-day moving average on your chart, a buy signal occurs when the 50-day crosses above the 200-day. A sell signal occurs when the 50-day drops below the 200-day. The time frames can be altered to suit your individual trading time frame.

AAPL chart

When the price crosses above a moving average, it can also be used as a buy signal, and when the price crosses below a moving average, it can be used as a sell signal. Since price is more volatile than the moving average, this method is prone to more false signals, as the chart above shows.

Moving averages can also provide support or resistance to the price. The chart below shows a 100-day moving average acting as support (price bounces off of it).

SPY chart

MACD (Moving Average Convergence Divergence)

The MACD is an oscillating indicator, fluctuating above and below zero. It is both a trend following and momentum indicator.

One basic MACD strategy is to look at which side of zero the MACD lines are on. Above zero for a sustained period of time and the trend is likely up; below zero for a sustained period of time and the trend is likely down. Potential buy signals occur when the MACD moves above zero, and potential sell signals when it crosses below zero.

Signal line crossovers provide additional buy and sell signals. A MACD has two lines--a fast line and a slow line. A buy signal occurs when the fast line crosses through and above the slow line. A sell signal occurs when the fast line crosses through and below the slow line.

ibm stock chart

RSI (Relative Strength Index)

The RSI is another oscillator, but because its movement is contained between zero and 100, it provides some different information than the MACD.

One way to interpret the RSI is by viewing the price as "overbought" - and due for a correction - when the indicator is above 70, and the price as oversold - and due for a bounce - when the indicator is below 30. In a strong uptrend, the price will often reach 70 and beyond for sustained periods, and downtrends can stay at 30 or below for a long time. While general overbought and oversold levels can be accurate occasionally, they may not provide the most timely signals for trend traders.

An alternative is to buy near oversold conditions when the trend is up, and take short trades near overbought conditions in a downtrend.

Say the long-term trend of a stock is up. A buy signal occurs when the RSI moves below 50 and then back above it. Essentially this means a pullback in price has occurred, and the trader is buying once the pullback appears to have ended (according to the RSI) and the trend is resuming. 50 is used because the RSI doesn't typically reach 30 in an uptrend unless a potential reversal is underway.

A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.

Trendlines or a moving average can help establish the trend direction, and in which direction to take trade signals.

ford stock charts

On Balance Volume (OBV)

Volume itself is a valuable indicator, and OBV takes a lot volume information and compiles it into a signal one-line indicator. The indicator measures cumulative buying/selling pressure by adding the volume on up days and subtracting volume on losing days.

Ideally, volume should confirm trends. A rising price should be accompanied by a rising OBV; a falling price should be accompanied by a falling OBV.

The figure below shows shares for the Los Gatos, Calif.-based Netflix Inc.(Nasdaq:NFLX) trending higher along with OBV. Since OBV didn't drop below its trendline, it was a good indication that the price was likely to continue trending higher after the pullbacks.

If OBV is rising and price isn't, price is likely to follow the OBV and start rising. If price is rising and OBV is flat-lining or falling, the price may be near a top.

If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom.

gm stock chart

The Bottom Line

Indicators can simplify price information, as well as provide trend trade signals or warn of reversals. Indicators can be used on all time frames, and have variables that can be adjusted to suit each traders specific preferences. Combine indicator strategies, or come up with your own guidelines, so entry and exit criteria are clearly established for trades. Each indicator can be used in more ways than outlined. If you like an indicator research it further, and most of all personally test it out before using it to make live trades.

Related Articles
  1. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  2. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  3. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  6. Chart Advisor

    Watch These Stocks for Breakouts

    These four stocks are moving within price patterns of various size, shape and duration, and are worth watching for a breakout
  7. Chart Advisor

    ChartAdvisor for November 20 2015

    Weekly technical summary of the major U.S. indexes.
  8. Chart Advisor

    Like Ranges? These Are Stocks to Consider

    Whether you want to trade the price fluctuations within a range, or await a breakout, here are four stocks for you.
  9. Chart Advisor

    Is This The Beginning Of A Downtrend In Home Builders?

    Falling lumber prices and weakness on the charts of home builders suggest that the next leg of the trend could be downward.
  10. Chart Advisor

    Low P/E Stocks Ready for a Turnaround?

    These stocks appear to be of great value based on P/E and Forward P/E.
  1. What are common technical indicators used along with Donchian channels?

    Traders apply a Donchian channel to a price chart to identify the points where a security's price breaks above the highest ... Read Full Answer >>
  2. How do traders identify key signals from the autoregressive moving average?

    An autoregressive moving average, or ARMA, is used in the study of time series plotting. Models built on ARMA rely on linear ... Read Full Answer >>
  3. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  4. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  5. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  6. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center