Basics Of Trending Indicators For Stock Trading

Trending indicators are one of two types that supply entry and exit signals for stock traders. The other kind is the oscillating indicator type, but this article is solely focused on the trending kind. What they supply, in essence, is advance notice about impending potential changes in stock and market trends.

The list of trending indicators includes moving averages and moving average envelopes, Bollinger bands and Momentum indicators. Each indicator works with stock prices, both historic and present. These are plotted out on a stock chart using a particular equation that might consist of average price ranges.

Moving averages: It's a very simple concept. The average of closing prices for a fixed period such as the last 20 days is calculated each day. These average points for each day plotted on the chart indicate where the price is heading to.

There are two kinds of moving averages - simple & exponential. In the former one, every price point has the same weight. In the latter one, those closest to the present date have heavier weights.

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 don't generate signals, thus providing a better trend indicator for traders.

Bollinger bands: The concept here is quite similar to the one above in the envelopes. Bollinger bands are calculated by taking a typical SMA of around 20 periods with a band above and below at MA plus or minus 1 or 2 standard deviations or another multiple of the period. It has become such a big hit that even other sectors besides the stock markets are utilizing it.

Momentum: This is the simplest of all, and has no need for equations, formulae or averages. All it needs is a comparison of the latest closing price against another one at an earlier date. Provided the latest price is higher than the earlier price, it indicates an upward trend. Conversely, if the latest price is lower than the one on a prior date, it points to a downward trend.

Some people new to the markets and the use of signals might feel all this is just inside speak. But the truth is that stock marketing investing these days is no longer about guess work, and needs very precise timing. Trending indicators are invaluable for traders dependent on signals to time their entry and exits for trades.