3 Technical Indicators for Trend Analysis (part1)
Trend indicators can help traders spot potential market direction. Here's how to use three technical indicators: moving averages, MACD, and Parabolic SAR.
Some traders, especially those using technical analysis in their trading, might focus on trends. And for good reason: Prices can change quickly, and some traders like to closely monitor trends and price changes. Trend identification can be a useful tool in finding entry and exit points.
Trends occur across all different time frames, and some traders believe the earlier a trend is spotted, the better the potential opportunity they have to capitalize on it. That's easier said than done. The nice thing is there are many indicators traders can use to identify possible trends, such as linear regression, price envelopes, ADX, and Keltner channels. Three trend indicators we'll discuss here include moving averages, moving average convergence divergence (MACD), and Parabolic SAR.
1. Moving averages
There are different types of moving averages. Two common types are the simple moving average (SMA) and exponential moving average (EMA).
An SMA is calculated by totaling the closing price of a security over a set period and then dividing that total by the number of time periods.
For example, the calculation for a 10-period SMA would be:
- CP = Closing price
- Number = Period
- SMA = (CP1 + CP2 + CP3 + CP4 + CP5 + CP6 + CP7 + CP8 +CP9 + CP10) / 10
The periods used for the calculation could be anything from minutes to years.
The SMA gives equal weighting to each time period, which may make it potentially well suited for identifying longer-term trends. If the security is above the moving average and the moving average has been going up, it's could be an indication of an uptrend. If the stock is trading below an uptrending moving average, it may still be an uptrend, but it might potentially be weakening. A downtrend occurs when the price is below the moving average and the moving average is pointing down.
To add SMA indicators to the thinkorswim® platform, select the Charts tab and bring up a chart. Select Studies > Add study > Moving Averages. You'll see a pretty extensive list of different types of moving averages. Select SimpleMovingAvg to plot the SMA on the chart. The default is the nine-period SMA. To change it, right-click the indicator line and select Edit study SimpleMovingAvg (CLOSE, 9, 0, no). From here, change the length to 50 and select OK. This will plot the 50-period SMA on the chart (see below).
Simple moving average
For illustrative purposes only. Past performance does not guarantee future results.
Another choice under the Moving Averages studies is the EMA, listed as MovAvgExponential. The EMA differs from the SMA in that its calculation assigns more weight to recent prices, making it potentially more responsive to short-term price action. As a result, the EMA tends to be used more than the SMA by short-term traders.
Exponential moving average
For illustrative purposes only. Past performance does not guarantee future results.
The type of moving average and time periods a trader might choose depends on their preferred trading style and time horizon. Traders could experiment with different indicators and strategies to determine what works best for their trade objectives.
