Technical analysts often say the trend is your friend. In other words, a stock going up in price is more likely to keep going up. Alternatively, one that is going down in price is more likely to keep going down. By having a clear view of the trend, you can decide whether to buy, sell or hold a position. However, determining a trend can sometimes be difficult. So how does one befriend the trend to make money? This blog post on market trend technical indicators has the answer.
Today I will talk about the five top market trend technical indicators all traders need to know. Whether this is your first day trading stocks, options, futures, or even cryptocurrency, these indicators are a good starting point. But first, let’s break down what exactly is a technical indicator.
A technical indicator shows up on your trading platform as a pattern. The pattern is derived from a mathematical formula based on historical data such as price, volume, and open interest.
More importantly, technical traders use these indicators to predict future price trends to make trading decisions.
Choosing The Perfect Set Of Market Trend Technical Indicators
I want to emphasize that this is not some sort of blog where I’ll tell you the secret market trend technical indicators to make you millions. Instead, let me let you in on a little secret: It doesn’t exist.
When I was new to trading, I struggled. But, looking back, it wasn’t for lack of energy or determination to succeed that I had. What I was lacking was focus; I was overwhelmed with the seemingly hundreds of indicators. I wished someone had sat me down and told me what to focus on. That’s why I’m here today.
A Solid Foundation or House of Cards?
Which would you prefer, living in a house built on a solid foundation or one built of cards? Obviously, you don’t need to answer that, but I hope the metaphor resonates with you. Trading is exactly like building a house; you don’t start with the roof.
Instead, by taking the time to build a solid foundation of knowledge, you’ve got a solid home by the time you get to the roof. So solid, in fact, that not even a hurricane will stop you.
Alternatively, by jumping from one fancy technical indicator to another, you may get to the roof, but it’s haphazardly held up by cards ready to blow over by even the slightest gust of wind.
The Top 3 Market Trend Technical Indicators
A quick disclaimer: The first indicator I will talk about isn’t really an indicator. It’s vital because all other indicators are based on them and use their data in their calculations.
Volume is a measurement of how much interest there is in a stock. It’s a measure of how many people are buying and selling the stock back and forth. Likewise, if people are not buying the stock, it’s because they really don’t care about it.
Because of this, it’s going to be hard to make money when there’s not much interest in it. Sure, you can always buy it but remember, you also have to sell it if you want to make money. You must make sure that there will be someone who actually wants to buy it from you.
How do you know there is someone? You simply look at the volume. Quite frankly, volume is so crucial that every platform automatically puts volume on your chart. Basically, you don’t even have a choice; it’s going to be there because it’s important.
Volume also verifies market trends. More specifically, volume confirms everything from uptrends, downtrends, sideways trends, breakouts and chart patterns. And for momentum traders, volume is like fuel for a race car. Without it, you won’t even get out of the gate.
For those who trade breakouts, a volume surge is mandatory to confirm that it’s in fact, a breakout. Likewise, any price movement with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume.
Moving Averages (MA)
A simple moving average is a market trend technical indicator used to determine the direction of a trend. It is called a “moving” average because it is continually recalculated based on the latest price data.
We have two different types of moving averages, simple and exponential. Firstly, the simple moving average (SMA) is obtained by summing the recent data points in a given set and dividing the total by the number of time periods. Secondly, the exponential moving average (EMA) gives more weight to the most recent price points.
Depending on your trading style, you may prefer the 50 and 200 SMA or the 10 and 20 EMA. Personally. I have been day trading the one-minute chart, and I like to use the 10 and 20 moving averages.
More specifically, I watch for the 10 EMA to cross under the 20 EMA.
Next to volume, the Volume Weighted Average Price (VWAP), is probably one of the most important day trading technical indicators. The volume-weighted average price (VWAP) appears as a single line on intraday charts (1 minute, 15 minute, and so on), quite similar to how a moving average looks on your chart.
Unlike other moving averages which only use the price of the stock, VWAP takes into account both price and volume. This is important as it lets you know if the buyers or sellers are in control.
I know of some traders who only use VWAP and Volume to confirm their entry and exit points. Personally, I make sure that the candlesticks are above VWAP before I go long.
Alternatively, the opposite is true; if I want to short, the candlesticks must be below VWAP. Some platforms like Trade Ideas even have built-in VWAP crossover scanners; this shows the weight this indicator throws around.
Did you know that VWAP and moving averages may look similar on your chart? However, these two indicators calculate different things. VWAP calculates the sum of price multiplied by volume and divided by total volume.
A simple moving average is calculated by summing up closing prices over a certain period (say 10) and dividing it by how many periods (10); volume isn’t factored in.
What Is Your Situation?
All things considered, you need to figure out what combination of indicators works best for you and your situation. So, for example, somebody who works a 9 to 5 job is going to need a little bit of a different strategy than someone who has all the time in the world to dedicate to day trading.
Neither strategy is right or wrong; it’s what works for your situation. Regardless, we all need to build a foundation whether or not you’re a day trader, swing trader, or investor.
Please don’t be fooled by someone selling the latest and greatest “strategy” to beat the market. There are many different ways to build your solid foundation. The common thread among all successful traders is that they took the time to build it. We all start from nothing and build.
I don’t want you to think that these are the only five indicators you should use and always stay with. However, these five will give you a firm foundation which you can build from and make money. As I mentioned above, there’s no such thing as the one perfect indicator or magic indicator algorithm.
If there were, we would all be rich, and you wouldn’t be reading this blog post. Until that day comes, you’d be wise to get building. What better place to start than with our free courses at Bullish Bears.