3 Technical Indicators for Trend Analysis (part2)
2. Moving average convergence divergence (MACD)
The moving average convergence divergence indicator, or MACD, combines both trend identification and timing into one tool. The MACD belongs to a group of technical indicators called oscillators because they tend to move back and forth from one side to the other over a period of time.
The MACD is built on the idea that when moving averages begin to diverge from each other, momentum is generally thought to be increasing and a trend may potentially be starting. The creator of the MACD, Gerald Appel, recommends using the settings of 8 and 17 periods to enter a position on a daily chart but suggests a different combination (12 and 26 periods) for selling opportunities. The 9-period MACD average would apply to both. Of course, keeping Appel’s original intent in mind, the individual trader would need to decide how to use the MACD.
When the indicator line crosses above that signal line, it means an upward trend may be starting, and when it crosses below, it may signal the start of a downtrend. The MACD can also be plotted as a histogram. When bars are above the zero line, it indicates a potential upward trend, and when the bars are below the zero line, it could mean a downtrend. The two-line and histogram MACD is plotted in the subchart below the price chart. To add the MACD indicator to a chart, under the Charts tab in thinkorswim, select Studies> Add study> Momentum Studies> A-M> MACD.
Applying the MACD
The 12-26-9 configuration is the default setting on thinkorswim, but it's possible to adjust the inputs depending on your trading preferences. Right-click the MACD indicator line, then select Edit study MACD. In the MACD Customizing window, change the input parameters and then select Apply.
3. Parabolic SAR
Another potential thinkorswim indicator for a trend-finding arsenal is the Parabolic "stop and reverse" (SAR).
The Parabolic SAR indicator is designed so that when a security is in an uptrend, the indicator is plotted below the price in the form of a dot (see below). This dot is the theoretical "stop" in the stop and reverse, the point at which (if the price touches it) the trend may have changed. When this happens, the Parabolic SAR is automatically plotted above the price, indicating a downtrend is in effect. Some traders use the Parabolic SAR to help determine where to place stop orders.
To add the Parabolic SAR to a chart, under the Charts tab in thinkorswim, select Studies> Add study> Upper Studies> M-P> ParabolicSAR.
Using Parabolic SAR to identify trends
As you can see from the chart above, the longer the Parabolic SAR is below (or above) the prevailing price, the stronger the trend may be. However, on short-term time frames, the Parabolic SAR may be more susceptible to false signals (what some traders call "whipsaws"). Like all trend-following thinkorswim indicators, the inputs for Parabolic SAR can be customized and used with any time frame.
Beyond these three technical trend analysis indicators, there are many other ways to identify and analyze trends in trading and investing. These studies can be used as stand-alone indicators or in conjunction with other indicators. Each trader should study these indicators to determine what will best serve their trading strategy.
