Participants in exchange trading can use a variety of strategies: long-term investments, arbitrage, scalping and trading using trends. Each of these cases requires a special approach to risk management and requires special psychology, as well as the use of specialized analysis tools (including graphical).
Portal Investopedia tells what indicators are used by traders whose strategies are built around following trends. We have prepared an adapted version of this material.
Note: indicators are just one of the supporting tools for working with exchange-traded assets; they do not guarantee positive trading results. In order to deal with the use of indicators, you will need a trading terminal (for example, SMARTx), as well as a brokerage account – you can open it online. You can practice using test account from virtual money.
Moving averages “smooth out” price data: a smooth line represents the average price over a period of time. What kind of moving average will be used depends on the selected time period for trading. For investors who implement long-term strategies (including those built around strong and long-term trends), there are 200, 100 and 50-day moving averages.
There are several ways to use these indicators. One of them is to analyze the moving average angle. If the line mainly runs horizontally for a long time, then this means that the asset price does not have a pronounced trend, it is within certain limits (“side” in terms of exchange traders). If the line goes at an angle, then there is a trend – upward or downward, depending on the direction.
An important point: moving averages cannot be considered as a tool that can at least somehow predict the future behavior of an asset. The indicator only shows what happens to the price, on average, over a certain time period.
Crossovers are another way to apply moving averages. For example, on a chart in the trading terminal you can display a 200-day and 50-day moving average. In this case, a signal to buy may be the moment when the 50-day average crosses the 200-day moving up. Conversely, a sell signal will be its intersection of the 200-day line in the downward direction.
Since the price is usually more volatile than the moving average, this method generates a large number of false signals.
Another option is to use moving averages as support or resistance levels. In the example below, the price seems to be repelled from the line below the chart – in this case, the moving average will be the level of support. If the price tries to “break through” it and bounce down – this is the level of resistance.
There is also an oscillating indicator MACD (Moving Average Convergence Divergence). It is used this way – the trader looks at the lines above or below zero on the histogram below the graph of the price movement of the exchange asset. If the lines are above zero for a considerable period of time, this signals an uptrend, and vice versa. Accordingly, signals about the purchase or sale of a specific asset are the intersection of the zero lines in the corresponding direction.
There are two lines in the MACD indicator – “fast” and “slow”. Their intersections also generate additional signals for transactions. When a fast line crosses a slow one in an upward movement – this is a buy signal, and vice versa, when this line falls below the slow one and crosses it – traders consider this as a sell signal.
Relative Strength Index (RSI)
An indicator called Relative Strength Index is another oscillator, but unlike MACD, its movement is in the range from 0 to 100.
One way of interpreting RSI is when it is above 70 on the histogram, it is a sign of an overbought asset and a signal to correct its value. And vice versa, when the indicator is below 30, it is a signal for a possible increase in demand and price.
With a strong uptrend, the price will often reach 70 or more, and with a downtrend, it will be below 30 for a long time. In general, this indicator, although it can signal trends, does not provide relevant signals for transactions.
Traders get out of the situation, for example, by buying stocks when the indicator is close to the “overbought” values and there is a growth trend. Short sales are carried out when the indicator is already in the overbought zone and a downtrend is emerging.
An example in the chart below: there is a long-term uptrend. A buy signal occurs when the RSI indicator moves below 50 and then goes above it. This means that the market has experienced a short-term collapse, and the trader buys as soon as it ends and the trend resumes. The figure of 50 is used because with an uptrend, RSI rarely drops to 30 – if this happens, then a change in direction of the trend is possible.
A sell signal, in turn, appears when the trend goes down and the RSI rises above 50, and then falls below this level.
On-Balance Volume (OBV)
Trading volume itself is a valuable indicator, and OBV allows you to extract even more data. This indicator measures the cumulative pressure of sellers / buyers, adding volume on days of upward price movement, and subtracting volume on days of falls.
Ideally, volume confirms trends. Rising prices usually go near the current trading volume, and vice versa, the volume decreases with a fall.
In the chart below, Netflix stocks are rising, as is trading volume. And since the OBV did not fall below the trend line, this is a good indicator that the price will continue to rise, especially after small decreases.
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