Trend-following in forex is one of the most common ways to position oneself in the FX markets. Trends usually take a lot of time to form and likewise, it takes a lot of variables for the trend to change direction.
Given the wide acceptance of trends in the forex market, traders usually prefer a trend-following strategy. This trend-following strategy can be designed in many different ways using different technical indicators.
So, if you are a forex trend follower, here are the top five trend indicators that you should know about.
#1. Price Action
We will start the obvious. Price is the single most important variable from which all other indicators trickle down. Therefore, understanding price action trends is perhaps the first on the list.
There are different ways to understand the trend in price charts. From higher highs and lower lows for an uptrend and vice versa, every FX trader should begin analyzing trends by looking at price first.
The chart below shows a EURUSD weekly timeframe chart with the highs and lows, indicating an uptrend and a downtrend.
Other variations of price action as a trend indicator include trend lines.
#2. The Moving Average
The moving average indicator is, of course, one of the most widely used FX indicators for identifying trends. While there are different types of moving averages, they all follow the same principle; to plot the average price for a specific duration over the price itself.
This suggests that when price is above or below its moving average, prices can be either bullish or bearish. Furthermore, depending on the slope of the moving average, we can also know the strength of the trend.
The next chart below shows a simple 52 week moving average on the price chart showing the strong downtrend.
But commonly, two moving averages (long term and short term) are used in conjunction to signal bullish or bearish markets. The moving average indicator is important because there are a number of other technical trend FX indicators available.
#3. The Parabolic SAR
Parabolic SAR (Stop and Reverse) is another handy trend indicator. Depending on the settings, PSAR is ideal to identify short term trends. It is easy on eyes and simply plots a dot above or below the high or the low in price.
The Parabolic SAR calculates its values using variables such as acceleration factor and extreme price. It is a forex indicator that is very useful to measure the short-term trends and the changes in these trends. FX traders can use the PSAR for entry or exit of a trade.
The chart below shows how the PSAR compliments the moving average indicator.
It shows the short-term corrections that are typical within the larger trend.
#4. The MACD (Moving Average Convergence, Divergence)
Oscillators, in technical analysis usually measure variables such as momentum or volatility. But MACD is unique as it is also a versatile trend indicator (besides gauging momentum in price).
MACD comprises of a histogram which oscillates around the 0-level and the fast and slow lines also known as the MACD and the signal line. This oscillator derives its values from the exponential moving average indicator with a setting of 12 and 26 periods.
Trends in the price chart can be validated using the combination of variables in the MACD indicator, as shown in the chart below.
#5. The Ichimoku Cloud
The Ichimoku cloud (also known as the Ichimoku Kinko Hyo) indicator is unique because it is a trading system in itself. But primarily, this is a trend following indicator with a lot more variables included.
The Cloud is often regarded as the support or resistance areas, while the Chikou, Tenkan-sen, and Kijun-sen measures the 9-period and 26-period levels on the chart. While it looks similar in function and visually, the Ichimoku cloud is regarded as one of the go-to trend indicators.
Some forex traders could find the Ichimoku indicator to be a bit intimidating due to the number of variables in this trading system. However, when there is a sustained trend in the FX market, the Ichimoku indicator can derive very good results.
Which Trend Indicator Should You Use?
The above-mentioned trend indicators are identified using the different methods used in identifying the trend. FX traders often make the mistake of using redundant indicators only because they look visually different.
As with all technical indicators, there is no single indicator that will give you the best results. It is up to you as a trader to try out the different trend indicators to understand what suits your trading style best.