Trend following is an investment strategy, which depends on the technical analysis of the prices of the stocks rather than focusing on the fundamental issues of the company raising their stocks. The trend traders find multiple of ways to obtain profit from trends. In the stock market, traders and technical analysts believe that the price of stocks fluctuates high and low with the change in the trend of the market. There are many indicators and oscillators defined to gauge the trend of the market. Apart from indicators and strategies several other factors play an important role in trend trading like risk management and trading psychology.
There are certain indicators, which are extremely popular and our favourite indicators of analysts. Moving averages and RSI are the three main indicators that help you in predicting the trend of the market.
Relative Strength Index
The relative strength index is a technical indicator used to analyze stock markets. The RSI is known as a momentum oscillator, which measures the speed of price movements. The RSI explains momentum as the ratio of higher closes to lower closes: stocks that have stronger positive changes have a higher RSI than stocks that have stronger negative changes. Naturally, The RSI is used on a 14-day timeframe. RSI is measured on a scale from zero to 100, where 70 is marked high level and 30 is marked low level. Extreme high and low levels are marked as 80 and 20 respectively and 90 and 10 occur less frequently and indicate stronger momentum.
Moving average indicator filters the noise from casual price variation. It helps to smooth out the price action of the stocks. Broadly, moving average indicator is divided into two categories. They are simply moving average and exponential moving average. Many technical analysts get the indication of a change in trend based on the implementation of moving average indicator.
On Balance Volume
On Balance, Volume is simple for of indicator but is effective one. Beginning from the arbitrary number, if the market ends up higher then the volume is added. And if the market ends up at low then the volume is subtracted. In this way, one can predict which stocks are being built up. And informs about the running total of the stocks. It also indicates the divergence, when the price of the stocks rises and the volume is increasing at slower rate or volume might have started falling.
By predicting the change in the trend, traders can earn a fat profit. By implementing the trend change indicators, traders and technical analysts get alert immediately as the trend varies.