The best indicator of the trend. What is the trend reversal indicator?

About 80% of Forex traders suffer losses caused by mistakes made by them in making decisions. The lack of financial analysis tools or the knowledge necessary to interpret its results affects the rationality of their actions. Moreover, a wide variety of tools for technical analysis of the foreign exchange market can be confusing to a novice investor.

Technical Analysis Tools

Understand the dynamics of the market will help effective data analysis tools, among which are indicators of trend change. Their goal is to reflect the trend in the dynamics of currency market rates. The trend indicator may indicate its direction (ascending, descending and lateral), force and reversal. There are the following indices:

• Trend indicator;
• The moment or rate of change of the exchange rate of the previous period to the current rate;
• Volatility or variability of the exchange rate;
• The volume of trades;
• Support and resistance.

Trend Indices

The best trend indicators are as follows:

• Moving averages (MA), simple SMA, exponential EMA and weighted WMA;
• Convergence-divergence moving average MACD (English MA convergence / divergence)
• TRIX (English triple EMA, triple EMA);
• Directional movement (DX);
• Medium DX (ADX);
• Trend line indicator;
• Commodity channel (CCI);
• Parabolic SAR (English stop & reverse, stop and reversal);
• SMI (English smart money index, index of "smart" money);
• Vortex (Vortex indicator, VI);
• Trend indicator Ishimoku.

Trend indexes help to trade in its direction, keeping long positions in conditions of an upward trend and short for a descending one. The drawback of these indicators is the lag at the time of the reversal of the market trend.

The moment indices

Avoid the delay by using the torque indicators. They help to establish a turn around the lower or upper boundaries of the horizontal trend channel, the moments of resale and repurchase. The disadvantage of the torque indicators is the premature signaling of the sale with an increasing trend and about buying with a falling trend. These include indicators:

• Stochastic;
• Forces (English force index, FI);
• True strength (TSI);
• Relative strength ( RSI) ;
• Ultimate (English ultimate oscillator, UOS);
• Cash flow (English money flow index, MFI);
• Williams' percentage range (English Williams% R,% R).

There are also psychological indices of Forex: the agreement of the players for raising (English bullish consensus), the index of engagement (English commitments of traders, COT), which assess the overall market situation, its inclination to fall or rise in quotations.

The indices of the trend and the moment often do not coincide in the forecasts. For example, with a long-term growth of the trend indicator, the trend direction increases, signaling a purchase. At the same time, the moment oscillators give a signal about repurchase, offering to sell. The reverse situation is observed in the period of a prolonged fall in prices, when the indicator of the direction of the trend is lowered, signaling the sale. In this case, the indicators of the rate of change in prices insist on buying.

Indicator of the strength of the trend

The strength of the growing trend can be estimated by its volume, direction and distance. When the closing rate is higher than the previous one, the strength of the trend is positive. And vice versa. The more the course has changed, the stronger the trend. The indicator of the strength of the trend is calculated by the product of the difference between the last and the previous price when closing on the volume of the currency. Thus, the strengthening of the trend is determined by an increase in the price or volume of trading. It varies from -100% to 100%.

RSI indicator

The relative strength indicator RSI is calculated as the ratio of the moving average of the positive changes in the closing rate for the period to the sum of the moving averages of positive and negative changes of the same price multiplied by 100. When the index value approaches 100%, the indicator signals an overbought currency, and 0% About its oversoldness. The extreme of the index chart, opposite to the direction of price movement, is the trend reversal indicator. Conversely, if the price chart shows a new maximum on an upward trend, and the index does not change, then a reversal is expected. To determine the trend change to the chart of the indicator, you can apply figures of technical analysis. Also, the signal of the trend reversal is the convergence and divergence of the indicator chart and the price - the price follows in the direction of the relative strength index.

For example, a trader enters a long position if the MA50 exceeds MA200, and the 3-day RSI falls below the set value of 20%, indicating oversold. Conversely, a trader enters a short position if MA50 is lower than MA200 and RSI3 rises above the set level of 80%, signaling overbought currency.

MACD indicator

The MACD trend indicator is constructed on the difference of exponential moving averages of a smaller and longer period. Usually use 12 and 26-day sliding. By MA intersections, it is judged about changes in the trend of different time periods, and by distance and relative position - about the stability of the ascending or descending trend. Subtraction from the short-term moving long-term gives an oscillator that visually takes into account these features. The indicator is a kind of analysis of two averages.

There is a histogram and a linear MACD indicator.

The MACD histogram indicator is calculated using the formula: MACD = EMA ₉ [A], where A = EMA ₁₂ [i] - EMA ₂₆ [i], where i is the price.

There are 3 types of signals :

• The passage of the maximum or minimum MACD is a signal that should be reacted to when receiving several additional ones;
• Crossing the MACD of the established border is the basis for opening the position;
• The intersection of the MACD middle also requires additional signals.

Signals confirming the signals of MACD-histograms are volume indicators. It is also advised to wait for the course to change in the direction of the forecast.

The linear MACD consists of a smoothed and not flattened A. These lines repeat the dynamics of the course.

Crossing the 12-day line with a 26-day top-down signaling about the sale, from the bottom-up - about the purchase.

The value following the minimum or maximum of the 12-day line is a warning requiring confirmation in the form of intersection of MACD lines.

The intersection of a linear MACD with a value boundary requires at least 2 confirmation signals.

The indicator should be used on charts not less than daytime. May be considerably delayed.

Parabolic SAR

Parabolic SAR, when the course enters a new extreme when the market trend changes, it changes MA stop limits to short-term (from 50 to 5 days), and the stop and reversal rate converges with the trend. The indicator repeats the trend to the intersection of the SAR level with the closing of the current position and the opening of the opposite position.

The initial course is equal to the previous minimum (maximum) rate. Then, the SAR is calculated as follows: SAR _{n + 1} = SARp + AF (M-SAR _n ), where:

• SAR _{n + 1} is the stop-price of an open position,
• SAR _n is the SAR of the previous period,
• AF is the acceleration increasing from 0.02 to 0.02 when the course reaches M.
• M is the new maximum (minimum) rate.

The parabolic system is used both to determine the closing position and to open positions.

Commodity Channel Indicator

The commodity channel indicator is a measure of price momentum and is calculated as the quotient of the price difference and its moving average from the absolute deviation of the price multiplied by the reduction factor.

- CCI = (P _n - SMA (P _n )) / 0,015D, where:

• P _n is a typical price;
• SMA (P _n ) is the moving average of a typical price;
• D is the mean of the absolute difference in the mean exchange rate and its SMA.

CCI values range from +/- 100. In this case, the excess of 100 indicates overbought currency, and -100 - about oversold, and this indicator of the trend reversal.

It is generally believed that going beyond the borders of 100 is not accidental and creates an opportunity for a deal. Buy should be in excess of CCI 100, and sell when the index goes below 100. It is recommended to open a short position with CCI values less than -100 and close-above -100.

Indicators MA

Moving averages are simple, weighted and exponential.

A simple MA corresponds to the average of the arithmetic rate for the period.

This is the simplest and most popular indicator that shows the trend. For example, the 200-day SMA remained a popular and effective tool for analyzing Forex quotations for decades. It is calculated by summing the closing rates for the past 200-day period and dividing its number of days. Analysts have simplified the calculation, making the closing courses 40 weeks and dividing the result by 40.

To calculate the next MA value, you need to subtract the value of the closing rate of 40-week-old, add the last closing rate and divide by 40.

The intersection of MA lines of different periodicity makes it possible to calculate the moment of the trend reversal. For example, the intersection point SMA9 and SMA14 signals a trend change.

The drawback of the method is the constant delay of signals, and its advantage is the simplicity and the possibility of using SAM lines as resistance and support lines.

WMA index

Weighted Moving Averages to each exchange rate give a weight that decreases as you move away from the current day:

- WMA = 2Σ (ni) P _ti / (n (n + 1)), where:

• P _ti - the value of the course at the time removed by i intervals from the current one;
• N is the number of intervals.

The making of late courses of greater weight is considered to be more informative than SMA. For long periods, apply SMA, and for short (not more than an hour) - WMA or EMA.

EMA Index

The exponential mean is also calculated by assigning weights to the rates taking into account all the rates of the previous period:

- EMA _t = EMA _t-1 + (K [Pt-EMA _t-1 ]), where:

• K = 2 / (n + 1), where n is the average period.

Thus, the moving average curve is smoothed relative to the courses.

At 1 course change, MA reacts twice - upon receipt and retirement of the value. EMA reacts once when receiving a course, which makes the indicator more preferable. Also, the EMA allows you to open positions on time.

In the analysis, it is necessary to find the intersections of the mean and the course graph, to find the points after the maximum or minimum of the mean, maximum divergence of MA and price. And also follow the direction of the indicator MA, which indicates the direction of the trend.

Stochastic Oscillator

Stochastic oscillator is an indicator of the rate of change in price. It is calculated by the ratio of the difference between the current closing price P _t and the minimum price L _n for the period n to the difference between the maximum H _n and the minimum price of the period L _n multiplied by 100%:

-% K = 100 (P _t -L _n ) / (H _n -L _n ).

The three-day moving average of the last three values of% K is calculated as follows:

-% D = 100 ((K ₁ + K ₂ + K ₃ ) / 3).

In addition to a simple average, both exponential and weighted mean can be used.

The indicator when discarding old data can change in an abrupt manner, which leads to instability and the supply of erroneous signals. Therefore, if you require an accurate trend indicator, then this oscillator is not the best choice.

If there is a discrepancy between% K and the exchange rate, a trend reversal is expected. If the rate reaches the next maximum without a maximum of% K, then we can expect that the downward trend will change ascending. Conversely, if the rate reaches a minimum, and% K does not, then you should expect a trend reversal upward.

The signal for the purchase is the rise of% K over% D, and for sale - the drop of% K below% D. According to the developer, the signal is more reliable, if% D before crossing% K has already turned in the direction of the new trend. The most reliable are buying signals in the 10-15% range and sell signals in the 85-90% range.

Trend reversal indicator without redrawing

The algorithms for calculating indicators use historical data. Each new price removes the first price of the settlement period. Even the best trend indicators, recalculating values for a new story, can change their previous values. Such a change in values when new data is received is called a redrawing of the indicator.

This effect is observed in most Forex indexes, therefore, in order to reduce the impact of such changes, a trend reversal indicator is needed without redrawing.

The absence of redrawing should always be checked independently, because the expression "no redrawing" has gained popularity and is used without sufficient grounds by developers of free and paid indicators to advertise their products.

You can visually check the absence of redrawing visually in two ways:

• Observation of the indicator on a small timeframe;
• Use on timeframes M30 and higher to speed up the procedure of the trading platform testing software, which can speed up the time of tracking the indicator.

The trend reversal indicator without redrawing is an interesting and profitable tool for technical analysis, but you need to take into account that redrawing is not always a drawback. It is a consequence of the changing situation on the market, and the "lost" signal could be false.

Williams' fractals are an example of how redrawing can be useful. When the indicator appears, you should wait for its confirmation: if the fractal includes 5 candles, then it is recommended to open the deal in the absence of its redrawing during the next two candles. And the trend indicator without redrawing will deprive the trader of such a tool, or, inspiring him with a false sense of reliability, will lead to losses.