Using Indicators In Trading Ranges And Trends by Bruce C. Kramer
Traders use indicators for generating buy and sell signals in a market. But what indicators should you use and when? Here's one private trader's technique for recognizing trends and trading ranges.
One question that must be considered in selecting indicators for market analysis is whether the market
in question is trending or in a trading range. This is important because certain indicators are more
effective in different types of markets. Oscillator-based indicators, such as the stochastic indicator, are
generally used for trading range markets, to try to locate the turning points of a security as it fluctuates
between support and resistance. The parabolic indicator and moving average-based indicators, for
instance, are used for trending markets. To best employ these indicators or others similar, first you must
determine if the market is trending or in a trading range.
TO TREND OR NOT TO TREND
First, select a method to measure the strength or presence of a trend. The simplest way to identify a trend
is by visually inspecting a chart. Figure 1 illustrates trends and trading ranges that are clearly visible.
However, it is not easy to define the required criteria to classify the market into our four categories using
the visual approach.
A more rigorous approach using multiple moving averages (MA) is suggested by Charles Le Beau and
David Lucas in Computer Analysis of the Futures Markets. As can be seen in Figure 2, the market is
trending up when the three-day MA crosses above the 12-day and trending down when the three-day drops below the 12-day. To spot a sideways market, Le Beau and Lucas add a third MA as in Figure 3.
Here, the trading range is identified by the four-day moving average having a value between the nine- and
18-day moving averages. A trending market occurs when all three moving averages are headed in the