Chapter 19, Part II. Indicators’ Application for Estimating of Trending Market.

Part II. Indicators’ Application for Estimating of Trending Market.

Commander in Pips: We know that when market falls in trend it usually creates higher highs and higher lows in an uptrend and lower highs/lower lows in a downtrend and the market usually moves in one direction. Let’s see how different indicators could be used for estimation of trending environment. Still, to be absolutely honest, I look at this skeptically, because any indicator is derivative from price action and using of price action itself to estimate trending sentiment looks to me to be much better. Still, many educational resources tell you to us some indicators for identifying a trending environment. Usually ADX, MA and Bollinger Bands are used. Also we will look at a bit of a different approach by using MACD and Displaced MA (DMA). So, we will start from ADX indicator, as on chart #1

Chart #1 | EUR/USD 60-min chart and ADX (10)

​

For example, you may apply not single close, but two or three closes above or below and so on. The point is that the overall strategy doesn’t change.

But here I want to note a very important feature of any MA:

1. MA is a lagging trend indicator. It means that first, it based on some preceding price action, and, second – it needs some time to react on this price action;

2. This lead us to next conclusion – since an MA lags after the market and when the market changes direction fast and often compared to the MA period, it leads to whipsaw price action. Appling an MA for trading in these circumstances could lead to losses.

Pipruit: I know! I know! I remember that!
​

Commander in Pips: ? ...Is there a fire somewhere?

​

Pipruit: I mean, I remember Average Directional Index…
​

Commander in Pips: Oh, right, I understand. So, if you have such good memory, tell me about it. How we can identify a trend with ADX?

Pipruit: Right. We know that ADX could move in 0-100 range, but it does not show the direction of the trend – only the power. If ADX moves above 25 then it tells that market is gaining power and turning into trending environment – the greater ADX value the stronger the trend.
​

Commander in Pips: That is correct, but ADX still has some disadvantages. First is, as you say, it does not show the direction of the trend. Second, ADX is a lagging indicator. Also, its interpretation in real time is not so simple a task. Still, on chart #1 we see that ADX nicely holds the trend action on EUR/USD. All the time ADX stands above 25 (red dot line).

The next indicator that could be used is a combination of different Moving Averages.