Which Trend Indicator Wins? by Markos Katsanos
Trends are obvious in retrospect, but identifying them in real time is a different story. Here, we look at four existing trend detection indicators to see how well they do their job. Which one comes out ahead?
Markets can either trend or move in a trading range (consolidate). Each phase requires the use of different types of indicators. In trending markets, you need to use trend-following indicators, such as moving averages, MACD, and so on, whereas for markets that are in a trading range, you need to use oscillators, such as the RSI or stochastics, which use overbought and oversold levels.
AVOID GETTING CAUGHT
One problem with all trending systems is that they only work when the market is trending, which is only about 30% of the time. If you fail to recognize that market conditions are not appropriate for trend system trading, you will be whipsawed out of trades with small to moderate losses, which over time will result in significant losses. On the other hand, in trending markets, prices can remain overbought or oversold for extended periods, and an oscillator-based system will produce premature signals. This is why its critical to identify the market phase when choosing which system to use...