Just like the name suggests, these types of indicators are used in trend trading. A big problem you can have as a beginner is figuring out whether the market is in a trend or not. In this section of this course, we will remove the doubts you always have about a trend. The trend indicators forex trading offers us are enough to be able to predict the market and be profitable.
Trend Indicators Forex – Bollinger Bands
This is a technical indicator that is used to measure market volatility and identify overbought and oversold conditions, or as others call it, quiet or loud. As a chart overlay indicator, it is displayed over the price. When the market is quiet, the bands contract, and when the market is loud, the bands expand. The upper and lower bands measure volatility or the variation of prices over time. Being a measure of volatility, these bands will always respond to changing market conditions. So how does it help you?
- Bollinger’s helps you to capture explosive market moves. The band has three lines; an upper band, a middle band (which we call the simple moving average), and a lower band. When you see the Bollinger’s bands squeezing it means that the market’s volatility is shrinking and we expect an expansion in the near future. This expansion is usually an explosive market move that you can capture for good profits.
- You can also use this band to better time your entries; this is useful when the market is trending it will tend to retrace back towards the 20-period moving average before continuing with the trend. The point at which the market touches the 20-period moving average can act as a good entry reason, of course after you have confirmed using your rules and strategies.
How to install Bollinger’s band on Meta Trader:
- On the tool bar select insert.
- Select indicators then trend.
- Click on Bollinger’s band then select the 20-period moving average.
Trend Indicators Forex – Moving Average Envelopes
The moving average envelopes are indicators that consist of a moving average and two other lines each on either side. Envelopes are used to confirm trends and identify oversold and overbought conditions.
They are banded indicators that are designed to encompass most price action. It is a useful tool in your technical analysis toolbox. Like the Bollinger Bands, it is a chart overlay indicator. One should note that the envelopes do not account for volatility (you will not find it expanding and contracting). Thus, it is important to combine it with the other indicators that account for volatility.
The goal here is to identify trends that change. A simple buy signal occurs when prices close above the moving average, while a sell signal occurs when your price closes below the moving average.
For instance, if the market is in an uptrend and closes above the moving average, that is a signal that can give you an entry reason. Before you trade, it is important to consider these two factors:
- Before trading wait for more confirmation from the market using your tools that the trend is legit.
- Or you can go long (trade) based on the original signal; which is the position at which the price closed above the moving average.
How to install on your charts:
- On the tool bar select insert.
- Select indicators then trend.
- Click on envelopes then select the 50 moving average envelopes (MAE).
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Trend Indicators Forex – Moving Averages
The main aim of the moving average is to identify trends and confirm reversals in the market. Moving averages filter out the noise in the market, in the form of rapid price movement, by showing a more definite and smoother movement of prices in the market.
The moving average is based on past prices, so it will not warn you in advance of the momentum of the price; however, it will confirm when a trend change has taken place. There are three types of moving averages; simple, weighted, and exponential.
Out of the three, the simple moving average is the slowest. It compiles price action for a longer period of history, which may cause you to miss out on big moves due to its lagging characteristic. With this in mind, the weighted and the exponential become better options for capturing market trends because:
- Moving Averages respond faster to price action by putting on more weight to recent periods and less weight on older periods.
- They also reflect a quicker shift in sentiment. This could be caused by changes in supply and demand thus making it easier to spot the movement of market price.
- You will find that they are closer to the market than the simple MA.
How to use the moving average:
- If the price is above the moving average the market is bullish.
- When the market is below the moving average the market is bearish.
- A break of the moving average by price may signal a potential trend reversal.
Using the moving average, traders watch for two main things: whether the price bounces on the moving average or whether the price breaks it. Whenever the market bounces off the moving average, it is a signal that the trend will continue.
This is a result of the original trend being “supported” by the moving average in the market. If the price breaks the moving average, it is predicted that there could be a reversal in momentum.
If the market, however, plays around the moving average, it could show that the market is ranging, meaning that the price has not yet decided on the direction it intends to take. While the market is ranging, we always wait for it to break the range so as to show which direction it intends to take. In Forex, always wait for the market to come to you.
How to install the moving averages:
- On the toolbar select insert then indicators.
- Scroll down and select trend then you will find the moving averages.
- For the purpose of our strategy, install these three; the 20,50, and 200 moving averages.
BONUS
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