The Trend Indicator

The most sort after forex technical indicators are trend identifying indicators. In all forex forums ,there are new "non-lagging" trend indicators being advertised. I prefer to keep things simple ,stupid (KISS) . I don’t know of any indicator that can foretell the future yet and have discovered that the simplest systems are used by the best traders. Nothing complicated or that has never been used before is on my trading charts.

When designing a system ,I am normally looking at trendlines, channels, moving averages, MACD, RSI, ADX and if I’m trading stocks and futures I will consider volume and volatility when I’m thinking about the system. I can choose one of these trend indicators or a mixture of some . Not too many though maximum 3. In our test trading system, we are going to consider 10 ema, 20 ema and RSI 45. The charting package we are going to use is xtick, however you can use any forex charting package you wish.

One point to note, if your charting package has an indicator that cannot be used any where else, then you are looking for the forex HOLY GRAIL. As we all know it, doesn’t exist. The indicators we are going to use can be found on any forex charting package eg xtick, metatrader, tradestation ,esignal etc. One of the reasons being that I like trading futures ,stocks and options too, I am in the school of thought that the best indicators only need a tiny change to work on any market.

Moving Averages

Moving averages are a lagging indicator. The lag may cause one to miss the beggining of a trend and even it’s end. Moving averages work by replacing old price with new prices. If the closing price is higher than the previous bars closing price, then the moving average will go up. By simply following which direction the moving average is going, you will know the general direction of the market. This should then tell you where to look for the best trades for you.

Choosing your Moving Average

My rule of thumb is choose wisely. There is nothing like the perfect moving average setup. Just a set up that you can understand when you are trading. Lower moving averages will react very quickly to prices however they are prone to whipsaws . A higher moving average will give you fewer trades and less whipsaw, however you are prone to be in a trade much longer after it started or exit a trade too late.

I have tried to discuss the guppy set up which is my preference however for our particular purposes .In our particular case we are going to use the 10/20 ema crossover. We are using the 10 ema as the short term trend indicator.The 20 ema is for the mid term trend. It is normally preferable that one uses a 3rd ema for looking for the longer term trend but we are going to use the RSI. Instead.The 10 day ema will hug prices and give signals more often so it’s likely to have whipsaws once in a while. But in combination with the 20 ema, the signals are less frequent but still likely to create whipsaws in a non-trending day. However , on a trending day, it is extremely profitable.

For those that are willing to learn , try adding the 50 ema to the system. It’s a very good combination.All in all test and experiment with the moving averages that you are comfortable with.

RSI

The rsi was introduced J. Welles Wilder and is otherwise known as the Relative Strength Index. It is an extremely powerful momentum oscillator. Most technical traders use the rsi as a overbought or oversold momentum oscillator. However in our case we are using it as a long term trend indicator. If your charting package allows you to set up the rsi in exponential rather than simple rsi , that’s better for the system.

So far we have the 10/ 20 ema crossover and the rsi 45 as our trend indicator. Next we shall discuss how to know what the trend is.

 

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Filed under: Forex Trade Setups • Forex Trading • How To Trade Forex

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