Trading successfully is all about reading the market sentiments, structure, and balance between bears and bulls. In fact, understanding if a given trend is losing or gaining momentum is crucial. After all, trading in the direction of a strong trend increases your profits while lowering your risk level.
Plus, with the best trend strength indicator, a trend day trader can easily find a strong trend and open positions in the right direction. With the best trend indicators that are based on moving averages over a certain period, you can easily judge the momentum of any strength.
If you’re trying to determine if the resistance and support levels can break or hold, if you can expect a reversal, then you should try a reliable market trend indicator. For more on what is the best trend indicator, please read on.
The Best Trend Indicators for Day Trading
Generally, there are a number of indicators that can help you determine the trend’s momentum. They can inform you of an expected reversal or if the trend will continue. Some of the best trend indicators include:
- ADX: ADX is a unique indicator that can easily measure the strength of a trend. Unfortunately, it is non-directional; therefore, it can’t inform you of the direction of the price. It can only tell you when the trend is gaining or losing momentum.
- Moving averages: another reliable tool for determining the momentum of the trend is the moving average. In fact, they’re known for offering a wide range of details, with their slope being quite crucial. When the stock’s price is above the Moving average, then the trend is strong.
- RSI: the RSI is the most accurate trend indicator available that works the same way as the ADX but is directional. In fact, in a strong uptrend, this indicator will make higher lows and new highs. When downtrending, it makes lower highs and new lows. But when ranging, it will move sideways between 30 and 70.
- MACD: the Moving Average Convergence Divergence is a unique oscillating indicator that can serve as a momentum indicator and also help with trend-following.
How to Use a Market Trend Indicator for Trading
RSI is a crucial oscillating indicator whose movement is contained from zero to 100, which means that it offers different details than the MACD. The RSI is interpreted by viewing it as overbought when it’s below 30 and overbought over 70.
In strong trends, the price will exceed 70 and stay there for an extended period.
On the other hand, the ADX is exceptional, especially when determining if the stocks are trending or not. A strong trend occurs when it’s above 25. Therefore, when it’s below 25, then you should avoid trend trading and go with a reliable range trading technique. So you can use it to confirm a breakout.
Trendlines are exceptional tools that can provide instant solutions to the trend’s strength. Therefore, you have to focus on the trendline’s angle since it will indicate the momentum of the trend. With a small angle, the uptrend will create a new low that’s moving fast. On the other hand, a huge angle shows that it’s not sustainable.
Trend Indicator Explained
Generally, the stock market moves either upwards or downwards. So how can traders determine the trend’s strength or how long a particular trend will last? Knowing the answer to this question is crucial as it will help you make correct exit and entry decisions.
Fortunately, there are lots of indicators that you can use, which include the ones mentioned below. But you have to determine the average baseline using the average-based indicators. You can do this by considering the share’s closing or opening price.
After getting the baseline, then you can analyze the market’s trend. How? Well, by viewing the movement of the price with the baseline, you will know the strength of the trend. If the share’s price is trending about the baseline, it’s a strong uptrend and vice versa.
Therefore, the primary function of the trend indicators is observing the trend’s performance over a certain period.
Most Accurate Trend Indicators for Stocks
There are several trend indicators that you can use when trading stocks together with the above momentum strength indicators. So if you love trend trading, then you need to know the direction of the trend. Some of the most popular trend indicators include:
- Supertrend: this indicator shows you the price movement’s direction. And when plotted correctly, below or above the closing price, it can inform you when the trend changes. Unlike most indicators, the supertrend changes its color based on the trend’s direction.
- Parabolic SAR: another best trend indicator for day trading that can highlight the direction of the stock is the Parabolic SAR. This indicator looks like a series of dots placed below or on top of the price bars. When the dots are on top of the price, then the bears are in control, and vice versa.
- On-balance volume: this indicator serves as a volume and trend indicator. It calculates the cumulative selling and buying pressure by subtracting the volume of down days and adding the up day’s volume. A drop in price is shown by falling OBV and vice versa.
- MACD: this trend indicator includes the signal line and the MACD. Fortunately, signal line crossovers provide you with reliable sell-and-buy signals.
Choosing the Best Stock Trend Indicator
Most of the top stock trend indicators can work perfectly, but you have to pick the one that works with your strategy. Remember, you should expect some false signals, so you should be ready to work with over 2 exceptional indicators.
With two indicators, you can get a confirmation of what’s happening to the chart before opening any position. Therefore, if the trend is your pal, you shouldn’t stay away from some indicators, including the ADX.
Another critical factor to consider is if it can give you both the strength and direction of the trend. For instance, ADX is a non-directional indicator that can’t tell you the trend’s direction. On the other hand, the RSI is both directional and determines the strength of the trend.