Trend

An uptrend consists of higher lows and higher highs. Every high follows a low which should be higher than the low before. The next high also should be higher than the last one. A downtrend is created with falling lows and highs.

Trend Lines

You can show an uptrend or downtrend with drawing a trend line. In an uptrend the lows are located on one line and in a downtrend the cyclic highs form a trend line.

Trend Channels

A trend channel is made up of two parallel trend lines, which connect higher (lower) lows and highs.

Trading Rules

Following trading rules can be used with trend lines and trend channels.

1. Falling prices which come close to the uptrend line and rising prices which are close to the downtrend line can be used for entry positions in direction of the main trend.
2. Downwards breaking of one uptrend line especially in closing prices is a sell signal. But you should wait for a confirmation of that breaking trend (wait for more closing prices below the line).
3. Prices reaching the upper end of an uptrend channel or the lower end of a downtrend channel can be used for exits (short term trading).

Moving Average

The Moving Average indicator is one of the trend following indicators and reacts to quote movements with delay. It shows a new trend after the incident occurred. The Moving Average is a kind of automated trendline. Short Moving Averages (e.g. 20-days-line) react more sensitive than longer Moving Averages (e.g. 200-days-line).

Simple Moving Average

The Simple Moving Average is the arithmetic mean of one period. There is one disadvantage. Every day is weighted equal so the first day has the same weight as the last day of the period.

How to use the Moving Average

Increasing prices over the Moving Average, a buy signal is generated and a sell signal is created with prices under the Moving Average. In a sideway market there are many buy and sell possibilities which could lead to mistrades. Despite these mistrades the trend direction is indicated very early and gives a good entry for the new trend. Longer Moving Averages miss the early entries because they react very slowly.

Bollinger Bands

Two standard deviations are placed above and under the 20 day Moving Average. A standard deviation is a statistical instrument which indicates how prices vary around the average price. These standard deviations assure that 95% of all prices run within the Bollinger Bands. The bands react to the current volatility and get closer or expand. If the volatility becomes smaller the distance between the bands contract and if the volatility is higher the bands will expand. If there is a very big distance between the two bands it shows that the trend will be close at its end. A significant small distance of the Bollinger Bands indicates a soon breakout.

How to use Bollinger Bands

You can easily use Bollinger Bands to get trading targets. If the price turns at the lower band and crosses the Moving Average the target should be the higher Bollinger Band. The opposite way around the target will be the lower band if the price turns at the higher band and crosses the Moving Average. In a strong upward trend the price will usually move between the upper Bollinger Band and the Moving Average. This Moving Average will also be a support. A breaking of this support can be evaluated as a trend reversal.