skrimon
Active Member
Nowadays, a HUGE number of Forex traders spend their time looking for that perfect moment to enter the markets or a telltale sign that screams “buy” or “sell.”
And while the search can be fascinating, the result is always the same. The truth is, there is no specific one way to trade the Forex markets.
As a result, traders must learn that there are a variety of indicators that can help to determine the best time to buy or sell a Forex cross rate.
Therefore, the top 4 trend indicators of 2020 are listed below.
Indicator №1: A Trend-Following Tool
It is possible to make money using a countertrend approach to trading. However, for most traders, the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the trend’s direction. This is where trend-following tools come into play.
Many people try to use them as a separate trading system, and while this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long position or a short position.
So let’s consider one of the simplest trend-following methods — the moving average crossover.
A simple moving average represents the average closing price over a certain number of days. To elaborate, let’s look at two simple examples — one long term, one shorter term.
Figure 1 displays the 50-day/200-day moving average crossover for the euro/yen cross. The theory here is that the trend is favorable when the 50-day moving average is above the 200-day average and unfavorable when the 50-day is below the 200-day.
Figure 1: The euro/yen with 50-day and 200-day moving averages
Figure 2 shows a different combination — the 10-day/30-day crossover. The advantage of this combination is that it will react more quickly to changes in price trends than the previous pair. The disadvantage is that it will also be more susceptible to whipsaws than the longer-term 50-day/200-day crossover.
Figure 2: The euro/yen with 10-day and 30-day moving averages
Many investors will proclaim a particular combination to be the best, but the reality is, there is no “best” moving average combination. In the end, Forex traders will benefit most by deciding what combination (or combinations) fits best with their time frames.
From there, the trend — as shown by these indicators — should be used to tell traders if they should trade long or short; it should not be relied on to time entries and exits.
Indicator №2: A Trend-Confirmation Tool
Now we have a trend-following tool to tell us whether the major trend of a given currency pair is up or down. But how reliable is that indicator?
As mentioned earlier, trend-following tools are prone to be whipsawed. So it would be nice to have a way to gauge whether the current trend-following indicator is correct or not.
For this, we will employ a trend-confirmation tool. Much like a trend-following tool, a trend-confirmation tool may or may not be intended to generate specific buy and sell signals.
Instead, we are looking to see if the trend-following tool and the trend-confirmation tool agree.
One of the most popular — and useful — trend confirmation tools is known as the moving average convergence divergence (MACD).
This indicator first measures the difference between two exponentially smoothed moving averages. This difference is then smoothed and compared to a moving average of its own.
When the current smoothed average is above its own moving average, then the histogram at the bottom of Figure 3 is positive and an uptrend is confirmed.
On the flip side, when the current smoothed average is below its moving average, then the histogram at the bottom of Figure 3 is negative and a downtrend is confirmed.
Figure 3: Euro/yen cross with 50-day and 200-day moving averages and MACD indicator
In essence, when the trend-following moving average combination is bearish (short-term average below long-term average) and the MACD histogram is negative, then we have a confirmed downtrend. When both are positive, then we have a confirmed uptrend.
At the bottom of Figure 4, we see another trend-confirmation tool that might be considered in addition to (or in place of) MACD. It is the rate of change indicator (ROC).
As displayed in Figure 4, the red line measures today’s closing price divided by the closing price 28 trading days ago.
Readings above 1.00 indicate that the price is higher today than it was 28 days ago and vice versa. The blue line represents a 28-day moving average of the daily ROC readings.
Here, if the red line is above the blue line, then the ROC is confirming an uptrend. If the red line is below the blue line, then we have a confirmed downtrend.
Note in Figure 4 that the sharp price declines experienced by the euro/yen cross from mid-January to mid-February, late April through May and during the second half of August were each accompanied by:
Indicator №3: An Overbought/Oversold Tool
After opting to follow the direction of the major trend, a trader must decide whether they are more comfortable jumping in as soon as a clear trend is established or after a pullback occurs.
In other words, if the trend is determined to be bullish, the choice becomes whether to buy into strength or buy into weakness.
If you decide to get in as quickly as possible, you can consider entering a trade as soon as an uptrend or downtrend is confirmed.
On the other hand, you could wait for a pullback within the larger overall primary trend in the hope that this offers a lower risk opportunity. For this, a trader will rely on an overbought/oversold indicator.
Read more: https://medium.com/daily-finance/4-...hat-are-hugely-effective-in-2020-7fbab2871847
And while the search can be fascinating, the result is always the same. The truth is, there is no specific one way to trade the Forex markets.
As a result, traders must learn that there are a variety of indicators that can help to determine the best time to buy or sell a Forex cross rate.
Therefore, the top 4 trend indicators of 2020 are listed below.
Indicator №1: A Trend-Following Tool
It is possible to make money using a countertrend approach to trading. However, for most traders, the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the trend’s direction. This is where trend-following tools come into play.
Many people try to use them as a separate trading system, and while this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long position or a short position.
So let’s consider one of the simplest trend-following methods — the moving average crossover.
A simple moving average represents the average closing price over a certain number of days. To elaborate, let’s look at two simple examples — one long term, one shorter term.
Figure 1 displays the 50-day/200-day moving average crossover for the euro/yen cross. The theory here is that the trend is favorable when the 50-day moving average is above the 200-day average and unfavorable when the 50-day is below the 200-day.
However, no matter what moving-average combination you choose to use, there will be whipsaws.
Figure 1: The euro/yen with 50-day and 200-day moving averages
Figure 2 shows a different combination — the 10-day/30-day crossover. The advantage of this combination is that it will react more quickly to changes in price trends than the previous pair. The disadvantage is that it will also be more susceptible to whipsaws than the longer-term 50-day/200-day crossover.
Figure 2: The euro/yen with 10-day and 30-day moving averages
Many investors will proclaim a particular combination to be the best, but the reality is, there is no “best” moving average combination. In the end, Forex traders will benefit most by deciding what combination (or combinations) fits best with their time frames.
From there, the trend — as shown by these indicators — should be used to tell traders if they should trade long or short; it should not be relied on to time entries and exits.
Indicator №2: A Trend-Confirmation Tool
Now we have a trend-following tool to tell us whether the major trend of a given currency pair is up or down. But how reliable is that indicator?
As mentioned earlier, trend-following tools are prone to be whipsawed. So it would be nice to have a way to gauge whether the current trend-following indicator is correct or not.
For this, we will employ a trend-confirmation tool. Much like a trend-following tool, a trend-confirmation tool may or may not be intended to generate specific buy and sell signals.
Instead, we are looking to see if the trend-following tool and the trend-confirmation tool agree.
Likewise, if both are bearish, then the trader can focus on finding an opportunity to short the pair in question.
One of the most popular — and useful — trend confirmation tools is known as the moving average convergence divergence (MACD).
This indicator first measures the difference between two exponentially smoothed moving averages. This difference is then smoothed and compared to a moving average of its own.
When the current smoothed average is above its own moving average, then the histogram at the bottom of Figure 3 is positive and an uptrend is confirmed.
On the flip side, when the current smoothed average is below its moving average, then the histogram at the bottom of Figure 3 is negative and a downtrend is confirmed.
Figure 3: Euro/yen cross with 50-day and 200-day moving averages and MACD indicator
In essence, when the trend-following moving average combination is bearish (short-term average below long-term average) and the MACD histogram is negative, then we have a confirmed downtrend. When both are positive, then we have a confirmed uptrend.
At the bottom of Figure 4, we see another trend-confirmation tool that might be considered in addition to (or in place of) MACD. It is the rate of change indicator (ROC).
As displayed in Figure 4, the red line measures today’s closing price divided by the closing price 28 trading days ago.
Readings above 1.00 indicate that the price is higher today than it was 28 days ago and vice versa. The blue line represents a 28-day moving average of the daily ROC readings.
Here, if the red line is above the blue line, then the ROC is confirming an uptrend. If the red line is below the blue line, then we have a confirmed downtrend.
Note in Figure 4 that the sharp price declines experienced by the euro/yen cross from mid-January to mid-February, late April through May and during the second half of August were each accompanied by:
- The 50-day moving average below the 200-day moving average
- A negative MACD histogram
Indicator №3: An Overbought/Oversold Tool
After opting to follow the direction of the major trend, a trader must decide whether they are more comfortable jumping in as soon as a clear trend is established or after a pullback occurs.
In other words, if the trend is determined to be bullish, the choice becomes whether to buy into strength or buy into weakness.
If you decide to get in as quickly as possible, you can consider entering a trade as soon as an uptrend or downtrend is confirmed.
On the other hand, you could wait for a pullback within the larger overall primary trend in the hope that this offers a lower risk opportunity. For this, a trader will rely on an overbought/oversold indicator.
Read more: https://medium.com/daily-finance/4-...hat-are-hugely-effective-in-2020-7fbab2871847
