Analysing Indicators and Spotting Trends
We are now aware of the various technical indicators that are used in technical analysis in the forex market. In this article we will see how indicators and trends are related. One of the best things to do during technical analysis is to use more than one indicator to get a fairly good idea of the how strong a potential trend is and how long it is likely to last.
A trend, from a trader’s viewpoint is basically a predictable movement of prices at support and resistance levels. If prices break either of these levels, it is a strong indicator of the trend’s staying power. Identifying trends on historical charts is not a difficult job; it can be done with near perfection. But accurately predicting and identifying price moves while the trend is still developing is a harder task. Draw trendlines over longer time frames, and gradually move down to shorter intervals (of the order of hours). This way you will not miss the long-term trend in trying to identify the short-term ones.
The Directional Movement Indicator (DMI) is a valuable tool that reduces guesswork and enables us to confirm our trendline analysis. It has two parts:
- Average Directional Movement Index (ADX): A higher ADX indicates a stronger trend. A reading of over 20 usually indicates a lasting trend. A sudden drop in ADX signals exit time, until a fresh signal is obtained from DI lines.
- DI Lines (DI+ and DI-): When the + reaches and crosses – levels, it is a buy sign, and vice versa.
A number of traders also refer to what is called the parabolic indicator to confirm ADX signals.
These methods can be used for the short term, even in a sideways seemingly trendless market. But as an obvious precaution, keep in mind the larger trends. Playing on a short term trend totally against the larger one is stupidity.
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