Trend following strategies are where you simply ride the forex trend, i.e. buy when the price is going up and sell when the price starts going downhill.
We cover the following trend indicators in this article:
- Moving Averages
- FxPremiere custom Forex TPL Indicator
- Bollinger Bands
- MACD (Moving Average Convergence Divergence)
- RSI (Relative Strength Index)
- OBV (On Balance Volume)
How does a trend emerge?
Going viral, thanks to the power of the internet. In the financial world too, there is Fear Of Missing Out, although here, the reason is a general desire to be on the winning side. Emotions drive people.
How is a trend strategy implemented?
Trend Following strategies aims to leverage market scenarios profitably. Reason being the high amount of risk and equally high amount of benefits attached to the same.
No single forex indicator can predict a secure way to buy or sell a security. However, there are a few famous ones which are employed frequently to gain an analytical perspective and logical decision-making.
Moving Averages indicator is a widely used technical indicators that are used to arrive at a decision that is not based on one or two episodes of price fluctuations.
How to use Moving averages in trend following strategies:
Moving averages provide a clear idea of whether to take a long or short position on the stock. If the stock depicts a negative trend ie the price is below the moving average, take a sell position.
Bollinger band indicators are signals plotted on a singular line which represent the price fluctuations for a particular stock. They consist of three lines, Upper Bollinger band, Middle band, Lower Bollinger band.
How to use Bollinger bands in trend following strategies:
When markets become more volatile, the distance between the signals increases or in short the bandwidth widens and the reverse for low volatility. Higher the volatility, higher the cue for quitting the trade.
MACD (Moving Average Convergence Divergence)
The Moving Average Convergence Divergence indicator (MACD) is a comparative analysis of two moving averages for two different data sets. Depending on the bandwidth of the time series, you can assess the price fluctuations for two different stretches of time.
RSI (Relative Strength Index)
The relative strength index ie RSI indicator is calculated using the following formula:
RSI = 100 – 100 / (1 + RS)
where RS = Average gain of up periods during the specified time frame / Average loss of down periods during the specified timeframe.
OBV (On Balance Volume)
OBV Indicator is a momentum based indicator which measures volume flow to gauge the direction of the trend. Volume and price rise are directly proportional. A rising price is depicted by a rising OBV and a falling OBV stands for a falling price. If OBV depicts a rise in the same pattern as the prices this is a positive indicator. While a contrast with the pattern depicts a negative indicator.
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