Newer traders are always looking for assistance in indentifying the trend of a market or an individual stock. Anyone who has been involved in the markets knows that trading with the trend is much safer and more profitable than trading against it. So how do you know when the trend is changing so you can adjust the types of trades you will take?
Looking at price and knowing the definition of a trend is the key. In our Professional Trader Course we teach traders how to do that. I invite you to take one of our courses and learn for yourself how successful traders make money in the markets timing the trend and trend changes.
A tool that many traders use to assist with trend identification is the moving average. While the moving average is a lagging indicator and is not as good as reading price movement itself, it can be useful to highlight trend changes and prevent a trader from making serious errors in their account.
Most traders will set the moving average to show them the average of closing prices. However, in a trend, we need to be focused on the highs and the lows. Trade Tiger software allows you set your moving average inputs to be the high or the low. By placing both a moving average set to the high and a moving average set to a low on the chart at the same time, we can create a trend indicator.
Looking at the following daily chart of the Nifty, I have a 10 period moving average set to the lows in blue and a 10 period moving average set to the highs in pink. While this will not allow you to enter and exit at the highs and lows, it will notify you when the trend has changed.
This technique may lend itself well to the investor. Using this technique on a weekly chart of the market or a stock may keep you in investments longer but allow you to identify dangerous shifts that could reduce your returns.
So while not perfect, the moving averages can offer useful information for traders looking to stay on the right side of the trend. As the saying goes, “The trend is your friend until the bend in the end.”
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.