Finding a suitable indicator that reliably defines a trend is one of the keys to successful investing, whether it is on the stockmarket, in forex trading or commodities. CFD traders are often faced with a bewildering array of trend indicators on their software what is macd , and when searching for the elusive holy grail of the perfect indicator, the idea is not to miss a major move but also not being whipsawed too often. There is of course no straightforward indicator, but this paper looks at the less well known TEMA.

The basic moving average

Traders usually begin with a basic simple moving average, which is easy to plot, and here there is a trade off in terms of the amount of data used. Longer term investors tend to begin with the 200 day moving average which is something of a yardstick, and the trend rules are very simple. If the share price is above the 200 dma, and the average itself is rising, this suggests a long term bullish trend or a buy signal. The opposite scenario is often used for selling, and long positions are often closed out if one of the above conditions is breached, but each investor has there own methodology.

The obvious problem here is that such a long term indicator misses the first few months of a change in trend, and whilst this is not such a problem for very long term players, it can result in the giving back of a large chunk of profits at the end of a trend. The benefits though are that very few changes need to be made to a portfolio, and there is a much lower chance of a quick reversal in the trend, which can often last many years.

As the length of a moving average shortens, more signals are giving as the average responds quicker to trend changes, but there is also more whipsaw action. In trading range markets, which can often last far longer than trending conditions, moving averages are of little use.

A quick word on the MACD

One refinement to standard moving average analysis is to use crossovers as signals, and one formula derived from this is the MACD which can be used to identify turning points, the momentum and the trend of any stock or index. The most popular MACD formula starts by subtracting the 26 day exponential moving average from the 12 day exponential moving average.

Crossovers between the moving averages are often used to provide golden and dead cross signals, and that formula provides the basic MACD line and the initial signals to watch for. What then happens is that a 9-day exponential moving average of that line is taken, and this is called the signal line, which gives various useful signals.

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