Trend Trading: The 4 Most Common Indicators ( Moving Averages ) (part1)

Trend traders attempt to isolate and extract profit from trends. The method of trend trading tries to capture gains through the analysis of an asset's momentum in a particular direction; there are multiple ways to do this. Of course, no single technical indicator will punch your ticket to market riches; in addition to analysis, traders also need to be well-versed in risk management and trading psychology. But certain strategies have stood the test of time and remain popular tools for trend traders who are interested in analyzing certain market indicators.

KEY TAKEAWAYS

• Trend trading attempts to capture gains through the analysis of an asset's momentum in a particular direction.
• While no single technical indicator will punch your ticket to market riches, certain strategies have stood the test of time and remain popular tools for trend traders.
• Moving average is a technical analysis tool that smooths out price data by creating a constantly updated average price.1
• The moving average convergence divergence (MACD) is a kind of oscillating indicator that can help traders quickly spot increasing short-term momentum.2
• The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock.3
• The on-balance volume (OBV) indicator measures cumulative buying and selling pressure by adding the volume on "up" days and subtracting volume on "down" days.4

Moving Averages

Moving average is a technical analysis tool that smooths out price data by creating a constantly updated average price. On a price chart, a moving average creates a single, flat line that effectively eliminates any variations due to random price fluctuations.
The average is taken over a specific period of time–10 days, 20 minutes, 30 weeks, or any time period the trader chooses. For investors and long-term trend followers, the 200-day, 100-day, and 50-day simple moving average are popular choices.
There are several ways to utilize the moving average. The first is to look at the angle of the moving average. If it is mostly moving horizontally for an extended amount of time, then the price isn't trending; it is ranging. A trading range occurs when a security trades between consistent high and low prices for a period such as days, weeks, or months. Many traders use strategies that follow these trading patterns.

If the moving average line is angled up, an uptrend is underway. However, moving averages don't make predictions about the future value of a stock; they simply reveal what the price is doing, on average, over a period of time.
Crossovers are another way to utilize moving averages. By plotting a 200-day and 50-day moving average on your chart, a buy signal occurs when the 50-day crosses above the 200-day. A sell signal occurs when the 50-day drops below the 200-day.1 The time frames can be altered to suit your individual trading timeframe.

When the price crosses above a moving average, it can also be used as a buy signal, and when the price crosses below a moving average, it can be used as a sell signal.
However, since the price is more volatile than the moving average, this method is prone to more false signals, as the chart above shows.
Moving averages can also provide support or resistance to the price.1 The chart below shows a 100-day moving average acting as support (i.e., the price bounces off of it)