Here are four trending indicators you can use to isolate the trend when trading. They include ATR Stops, MA Envelopes, Turtle Channels and TTM Trend. Moving averages are a popular trending indicator, but I don’t find them useful and don’t use them. I prefer the indicators discussed below. In my opinion they are better, and you’ll occasionally see these indicators on the charts I publish…although I typically trade off price action alone (no indicators). “Better” is subjective in this case. As with everything in trading, it’s how we use a tool, and not necessarily the tool itself.
Ultimately each trader must decide which tools they will use, formulate a trading plan and then stick to that plan. If you are still deciding which tools you want to use though, these indicators may help you spot the trend a bit better. These trending indicators highlight the trend or current momentum, but are not necessarily used to generate trade signals.
The ATR Stop is an indicator that places a line below the price when the price is rising (uptrend), and places a line above the price when the price is falling (downtrend). These are typically colored blue and red respectively. Only one color/line appears at a time, indicating the most recent trend direction.
How far the line is above or below the price is based on the Average True Range (ATR). Think of ATR as how much an asset moves on average per price bar. For a full description of ATR see StockCharts.com.
The EURUSD hourly chart in Figure 1 has an ATR Stop indicator on it. There are two inputs for the ATR Stop indicator; one is the Period, and the second is the Coefficient. The Period is how many price bars are used to compute the ATR. As a basic guide, if you’re longer-term trading use a longer period. For shorter-term trading use a shorter period so the ATR adapts more quickly to changing market conditions. The Coefficient is the number of ATRs above or below the price the indicator will appear.
Figure 1 shows an ATR Stop indicator using 160 Periods and a 6 Coefficient. An ATR indicator is also shown at the bottom of the chart for reference. The ATR reading is currently 17. That means the price is moving about 17 pips per hour (price bar), when averaged over the last 160 hours. A coefficient of 6 means the ATR Stop indicator will appear at 6 x 17 pips = 102 pips above or below the price. It won’t stay that distance though. Like a regular trailing stop loss, when the price moves higher, for example, the line will be 6 x ATR behind the highest point. The ATR line will only move up during an uptrend, not down, so eventually the price will drop through the line signaling a reversal.
When the ATR Stop is below the price (blue), favor long positions. When the ATR Stop is above the price (red), favor short positions.
For comparison, a 160 period moving average has also been added to the chart (so both indicators are analyzing the same data).
Figure 1. EURUSD with ATR Stop (160, 6) and Moving Average (160). Click to enlarge.
During this time period the ATR Stop did a good job of picking out the trends. The indicator signaled an uptrend (blue) during the choppy period in middle of the chart, while the moving average provided little insight. The indicator also kept the trader on the right side of the market during the rally and the ensuing decline.
If you want to use it for trade signals, isolate a longer-term trend using the indicator on a longer time frame. Then switch to a smaller time frame and the indicator may point out short-term turning points to get you into the longer-term trend. On the smaller time frame you’ll need to reduce the ATR Stop inputs for more timely signals. This is just an idea; the method has not been precisely defined nor tested.
Moving Average Envelopes
MA Envelopes are a moving average plus a “buffer” on each side which highlight the price area a trend may move in. The envelopes are a specific percentage away from the moving average, this is called the Deviation. Therefore, your primary inputs for the MA Envelopes are Period (the period of the moving average) and Deviation (how far the upper and lower bands are from moving average, as percentage).
Figure 2 shows an hourly EURUSD chart. For this one a 120 Period moving average is applied (middle magenta line). The upper red line and lower blue line are Envelopes which form a band around the moving average. The Deviation is 0.75%.
Envelopes are useful, but require a few guidelines:
- When the price is rising, pullbacks should stay above the lower blue line. If they don’t, the uptrend could be in trouble.
- When the price is rising, the pushes higher should reach the upper red band. If they don’t, the uptrend could be in trouble.
- When the price is falling, rallies should stay below the upper red line. If they don’t, the downtrend could in trouble.
- When the price is falling, sell offs should reach the lower blue band. If they don’t, the downtrend could be in trouble.
- When the price is hitting both the upper and lower band consecutively the price action is very choppy, likely trendless and possibly ranging (or you need to increase the deviation of the indicator).
- A pause near the middle band (moving average) helps confirm the recent signal. For example, if the trend was up, but has just broken below the lower band, that signals weakness. When the price bounces, if it stalls near the middle band it’s probably a good short–not only can it not make it to the top band, it can barely make it to the middle band.
Lots of guidelines; here’s some ideas on how to use them.
If the trend is up but the price falls through the lower blue band, that signals a possible trend reversal. Look for shorts, and the trend is highly likely down if the price is unable to make it to the upper band before falling again.
If the trend is down, but price rallies above the upper red band, that signals a possible trend reversal. Look for longs, and the trend is highly likely up if the price is unable to make it to the lower band before rallying again.
In figure 2 the guidelines are used to isolate areas where we favor longs or shorts. The simple rules did a good job of keeping us long when the trend was up, short when the trend shifted down, and even provided good data when the price action was choppy toward the middle of the chart. The arrows mark relevant data points where the price action and envelopes provide us with information about which direction to trade…the arrows are not necessarily entry or exit signals.
Figure 2. EURUSD Hourly Chart with Moving Average Envelopes (120 Period, 0.75% Deviation). Click to enlarge.
Well that looks wonderful. There are a few issues though. For every time frame you trade, and likely every asset you trade, you will need to set an appropriate Period and Deviation in order for the envelopes to be of use.
If you are day trading, the Deviation may be 0.03% or 0.07% (for the chart above it was 0.75%). With day trading you will also want to reduce the Period–likely to 30 or lower (chart above is 120). Assets that are more or less volatile will require a different Deviation setting. Basically, this indicator is not one size fits all. You need to set the indicator so it aligns with the volatility of the trends you are seeing, and provides good signals. Even with that, the deviation may need adjusting in the future if the asset becomes more volatile or sedate.
I have not found this a problem. It takes only a couple seconds to put the indicator on the chart and find a setting that works well for that asset and time frame.
You can also try Bollinger Bands or a Keltner Channel.
Turtle Channels are based on the method made famous by Richard Dennis in the Turtle Trader experiment of the 1980’s. For more on the Turtle Traders, and the method they used, download the eBook on the Free Trading eBooks page.
Turtle Channels look very similar to the ATR Stop discussed above. They will provide similar information much of the time, but they aren’t the same.
Turtle Channels have a trading strategy built into them. They provide trade signals, as well as stop loss levels. I leave that up to you if you choose to use the indicator as a trade signal. I use different settings and view the indicator more as a trend confirmation indicator, not a trade signal provider.
More information on the Turtle Trading Strategy, as well as the ability to download the Turtle Channel indicator for MetaTrader 4, is here: https://www.mql5.com/en/code/10727.
Here’s the MetaTrader 5 version: https://www.mql5.com/en/market/product/1804 along with details of the Turtle strategy. Both descriptions are worth reading to understand a bit more about the strategy and the indicator.
Figure 3 shows a Turtle Channel indicator with a 95 Trade Period (the primary input for the red and blue lines) on a EURUSD 1-hour chart. 95 periods shows the overall trend, not trade signals. If using the indicator for trade signals, a Trade Period of about 20 is used.
The small dotted lines are “Stop Loss” lines. While the red and blue lines indicate the overall trend, the Stop Loss line indicates when a pullback against the trend may be starting. For example, when the trend is down–price under red line–the price should also be under the dotted line when in a trade. When the price moves above the dotted line a pullback against the downtrend may be starting.
Figure 3. EURUSD 1-Hour Chart with Turtle Channels (95 Trade Period). Click to enlarge.
Different chart types filter out noise, time or apply strategies within the price bars to help isolate the trend. Renko charts for example filter small price movements and aren’t concerned with time. Heikin Ashi charts show price bars that are averaged and colored. Since the bars are averaged, small deviations against the trend don’t show up. By filtering out some information the trend becomes more clear, but some data is lost while using Renko or Heikin Ashi charts. I like the trend defined, but I also like to see all the price data available from a price bar (open, close, high and low of each price bar). Enter TTM Trend.
TTM Trend allows you to see the open, high, low and close of each price bar, but each price is colored–either red or blue–depending on if that price bar closes above or the below the average price of the last five price bars. If the price is higher than the average, the bar is blue. If the price is lower than the average the bar is red.
Figure 4 is a 4-hour chart of the EURUSD. If you use the other indicators to help isolate the dominant trend, then the transition from blue to red, or red to blue could aid in confirming trade signals…or even generating them. The color coding may also help you stay in a trending move until there is some evidence of a reversal (color change).
Figure 4. EURUSD 4-Hour Chart with TTM Trend (6 Period). Click to enlarge.
In hindsight the indicator looks wonderful (sometimes) but it also provides a lot of false signals. This is a short-term indicator based on the last 5 price bars. It doesn’t tell you the overall trend; that’s what the indicators above are for.
What TTM Trend shows is current momentum. So if the trend is up, but pulling back, hold off on buying while the bars are red. Wait till they turn blue. This is basically the approach discussed in how to How to Day Trade Stocks and How to Day Trade Forex where we are trading with the trend, waiting for a pullback and then entering when the price begins to move in the trending direction again.
There are a couple issues with the indicator. One is the false signals, but if you are trading with the trend and waiting for good entry points the TTM Trend is still a good visual aid.
Another issue is that the color of the bar will change while the bar is forming (or have no color until it completes, depending on your settings). That means you need to wait for the bar to complete before you can act on the information the indicator provides. A lot can happen in one price bar, so traders still need to be on their toes and not totally relying on the indicator. By the time you get a signal to get in or out–when the bar completes and the color is confirmed–it may be too late.
Where To Get The Trending Indicators
Envelopes come pre-installed on MT4 and MT5 and in most trading platforms.
Various versions of the ATR Stop and Turtle Channel indicators are available for free from the “Code Base” in the MT4 or MT5 trading platforms, or from https://www.mql5.com:
- Turtle Channels: For MT4 https://www.mql5.com/en/code/10727 and for MT5 https://www.mql5.com/en/market/product/1804
- ATR Stop: https://www.mql5.com/en/code/9217
Turtle Channels are not a common trading tool, so the indicator may be hard to find for certain platforms.
There is a version of the ATR Stop in Thinkorswim called ATRTrailingStop. Another similar indicator which may be available on some platforms is called Chandelier Exits. Chandelier Exits are available from the list of chart overlays on StockCharts.com.
TTM Trend is available on Thinkorswim for free. For MT4 download it here: https://www.mql5.com/en/code/7195. TTM Trend is also available on NinjaTrader, TradeStation, eSignal and Sierra Charts, but there may be a fee to access it.
There are loads of trading platforms so there are no guarantees all these indicators will be available on all platforms.
Final World on Moving Average Alternatives
Indicators must be calibrated to the market and time frame you trade on. This is not an endorsement for these indicators or settings; test them out using your own personalized setting to see if they help you.
I am not a big fan of the moving average in its typical form. I like these trending indicators better. You may as well, or you may not. Trading is still tough business. It’s how we use the tools that matter, not necessarily the tools themselves. It’s still up to us to stay in good trades and get out of bad ones. We still need a trading plan and the discipline to execute it. We need to control our risk with stop loss orders and control our position size.
The settings for each indicator should be based on how you want to trade…do you want to catch bigger moves? Or trade smaller gyrations? Set the indicator up so it works for what you want to do.
Have a free indicator you love? Be a hero and share it in the comments below.
By Cory Mitchell, CMT
To learn more about day trading and swing trading the forex market–including basics to get you started, 20+ strategies and a plan to get you practicing and successful–check out my Forex Strategies Guide for Day and Swing Traders 2.0. The book covers price action strategies, not indicators.