trend-following – Forex Academy

Introduction

In the previous lessons, we have understood what leading, and lagging indicators are. We also saw how these indicators could be further divided into other types. Here’s a summary of everything we’ve learned so far in this space.

Leading Indicators

Leading indicators are those who forecast prices in the market using historical prices. It indicates a signal for the continuation or reversal of a trend the event occurs. However, these indicators do not work with complete certainty. As they are making a prediction, it is more probability driven.

Lagging Indicators

Lagging indicators, as the name suggests, are lagging in nature. These indicators confirm the market trend using past prices. They are called the trend-following indicators as they give an indication once the trend has been established in the price charts. However, these confirmatory indicators are more reliable than the leading indicators as they give more accurate signals though they are late in doing so.

Please refer to this article to know the differences between these two types of indicators.

In the industry, there are three types of indicators that are widely used. They are

Oscillators
Trend-following indicators
Momentum indicators

If we were to put them into the bag of leading or lagging indicators, Oscillators are leading, trend-following indicators and momentum indicators are lagging. Note that an indicator may not be under one of the types; they can be a combination of two or all three.

Oscillators

An oscillator is a leading indicator that moves within a predefined range. These are to our interest when it crosses above or below the specified bound. These areas determine the oversold and overbought conditions in the market. These indicators are very helpful in determining market reversal. Some of the most popular oscillators include MACD, ROC, RSI, CCI, etc. The usage and interpretation of oscillators have been discussed in detail in this article.

Trend-Following Indicators

Trend-following indicators are lagging indicators that are usually constructed with a variety of moving averages. Crossovers are the typical strategy used with these indicators. These indicators give a signal to buy or sell when the market has already begun its move. Hence, these indicators give us late entries but are more convincing than leading indicators. For example, Moving Averages and MACD are the most used trend-following indicators.

Momentum Indicators

As the name clearly indicates, these indicators show the speed or the rate of price change in the market. Since the momentum can be calculated after the price moves, it is considered a lagging indicator. These indicators indicate when there is a slowdown in the buyers or sellers. And with this, we can assume for a possible reversal. More about this can be found here.

Conclusion

This sums up the concept of leading and lagging indicators. Having an understanding of these indicators is necessary because it is risky if a lagging indicator is analyzed as a leading indicator and vice versa. Also, it is recommended to use these indicators in conjunction with each other for better results. In the upcoming course lessons, we will be discussing interesting topics related to Elliot Wave Theory.

The trend is the trader’s friend. To be able to spot the trend and reversal point are the two most important factors of price action trading. In the Forex market on the minor charts, trend changes in a second. However, the trend usually continues on major charts such as the H4, the daily as well as weekly. In today’s lesson, we are going to demonstrate an example of how we can ride on a trend and make most of it.

The chart shows that after making a strong bearish move, the price produces three consecutive bullish corrective candles. It finds its support and creates a bearish engulfing candle closing below consolidation support. The sellers may trigger a short entry right after the last candle closes. Let us proceed to the next chart.

The price heads towards the South and hits 1R. Look at the last candle. The candle comes out as a bearish engulfing candle as well after a long consolidation. However, the sellers on this chart shall skip taking this entry for its shallow consolidation. Let us find out what happens next.

The price again consolidates and produces another bearish engulfing candle. The sellers may trigger another short entry right after the last candle closes. This is the second entry of the trend.

As expected, the price again heads towards the South. This time the price moves with strong bearish momentum. The sellers again make some profit here. Let us proceed to the next chart.

The chart after producing one stronger bearish candle consolidates. This time the chart presents an A+ trade setup with deep consolidation and a strong bearish engulfing candle. The sellers may trigger another short entry here with 1R.

This is what tells the story of the Forex market. This one has been the best entry so far on this chart. However, the price does not head towards the trend’s direction as expected. Nevertheless, it hits the target again (1R). The sellers again make some pips. Altogether, it offers three entries and this is called riding on a trend. By looking at the chart, it seems it may provide more. The buyers must stay out of this chart until it produces a strong bullish reversal.

Meanwhile, the sellers shall keep eying on the chart to go short with the same process. It does not happen so often but when it does, traders shall make most of it. As they say, “Trend is your Friend,” and we have just demonstrated that riding on a trend is very rewarding.