Entry and exit signals for stock trades are generated by trending indicators. There is likewise an additional kind known as the oscillating indicator. However, this write-up will focus solely on trending indicators. These are extremely helpful for understanding in advance that stock market trends are preparing to change.
Momentum, Bollinger bands, Moving averages and Moving average envelopes are among the well-liked trending indicators. They can be visualized as stock charts based on price data. Present and historic as well as average prices are utilized.
Moving averages: This is a simple and effective indicator. It simply plots the average closing price over a set period like the past 20 days. This point is tracked every day on the chart, and provides a extremely clear sense of which direction the price is headed to and under what value it will be placed on each day in the near future.
Moving The Discussion Forward
It can be a simple moving average (SMA) or an exponential one. SMA is the one outlined above where every point on the map is given the same weight. In an exponential form, the latest prices carry more weight.
Moving average envelopes: This is an enhanced version of the moving average (MA) indicator where envelopes run parallel to the MA baseline. The envelopes are charted to be a set percentage from the baseline. This provides a filter region around the baseline so that temporary spikes do not generate signals, thus providing a better trend indicator for traders.
When the actual stock price moves away from the Bands back towards the moving average, it can be seen as a signal that the price trend has slowed, and will move back towards the moving average. However, it is often the case that the price to bounce off the Bands a second time before a confirmed move towards the moving average.
Bollinger bands: The conception here is virtually the same as described above for the MA envelopes. It is according to a simple MA with a period that is normally set to 20 and bands above and below that MA plus or minus multiples (usually twice) of the period. It is now famous enough that other industries have started using it too.
History shows that a stock usually does not stay in a narrow trading range for long, as can be gauged using the Bollinger Bands. Strategies include relating the width with the period of the bands. The narrower the bands, the shorter the time it will last. Therefore, when a stock starts to trade within narrow Bollinger Bands, we know that there’s going to be a substantial price fluctuation in the foreseeable future. However, we don’t know which direction the stock will move, hence the necessity to use Bollinger Bands strategies, along with other technical indicators.
When the stock starts to become very volatile, it is depicted in the table by the actual stock price ‘hugging’ or staying very close to either the upper or lower Bollinger Bands, with the Bands widening substantially. The wider the Bands are, the more volatile the price is, and the more likely the price will fall back towards the moving average.
Momentum: This is the simplest indicator and does not really involve any equations or formulas, and relies on plain common sense. All that needs be done is compare closing prices between the current date and another one in the past. If the current closing price is higher, the stock is on an upward trend. If not, it’s on it’s way down.
Some of these descriptions may appear to be a geek’s paradise to those unaware of how traders use signals. But the truth is that stock trading is a extremely precise science. Signals generated by trending indicators are absolutely essential for traders. It determines the exact moment when traders will enter or exit a trade.