Technical Indicators: Trend-Following

Trend-following technical indicators determine the direction of the current trend and react much more smoothly to price action than oscillators. They look deeply into past price data and often have internal smoothing to filter out market noise and minor volatility to evaluate the overall direction of the “time frame” been studied.

The most common trend-following indicators include moving averages and bollinger bands. Let's take a closer look..

1) Moving Averages

Moving averages (MA's) are one of the most popular technical analysis tools used when trading forex. Moving averages lag price, in other words, if price starts to move sharply upward or downward, it will take some time for the new data to filter into the moving average calculation and for it to react or "catch up".

The basic concept is, that when it is above, conditions are "bullish" and when below, conditions are "bearish". Additionally, moving averages will slope upward or downward over time. This adds another visual dimension to the analysis.

Three types of Moving Averages:

Simple moving average (SMA)
Exponential moving average (EMA)
Weighted moving average (WMA)

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2) Bollinger Bands

Bollinger bands adjust themselves to the current market conditions. During periods of lower volatility, in sideways moving markets, the bands contract toward the moving average(middle band); during periods of high volatility, the distance between the two bands will widen and move further away for the middle band.

Bollinger Bands consist of three components: