Trend Analysis Tools

Trend analysis tools help identify the direction and strength of market trends, plus key support/resistance levels. These indicators answer the fundamental question: "Is this a trending or ranging market?"

Why Trend Analysis Matters

The golden rule of trading: The trend is your friend.

Most successful traders make money by following trends, not fighting them. Trend analysis tools help you:

• Identify whether a trend exists
• Measure trend strength
• Find optimal entry and exit points
• Spot potential trend reversals

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1. Average Directional Index (ADX)

What It Is

ADX measures trend strength, not direction. It tells you whether the market is trending strongly, weakly, or not at all.

Creator: J. Welles Wilder Jr. (1978)

Key Insight: ADX doesn't tell you if the trend is up or down — only how strong it is.

Components

ADX comes with three lines:

1. ADX Line — Measures overall trend strength (0-100 scale)
2. +DI (Plus Directional Indicator) — Measures upward price movement
3. -DI (Minus Directional Indicator) — Measures downward price movement

How It's Calculated

The calculation is complex, but conceptually:

1. Calculate True Range (same as ATR)
2. Calculate +DM (Positive Directional Movement) and -DM (Negative Directional Movement)
3. Smooth these values over period (typically 14)
4. Calculate +DI and -DI
5. Calculate DX (Directional Index) from the difference between +DI and -DI
6. Smooth DX to get ADX

You don't need to calculate it manually — Kelor does this for you.

Understanding ADX Values

ADX Scale:

• 0-25 = Weak or no trend (ranging/choppy market)
• 25-50 = Strong trend
• 50-75 = Very strong trend
• 75-100 = Extremely strong trend (rare)

Key Levels:

• Below 20 = Definitely ranging, avoid trend-following strategies
• Above 25 = Trending, trend-following strategies work well
• Above 40 = Very strong trend, ride it

Trading Signals

1. Trend Strength Filter

Use ADX to decide whether to use trend-following or range-trading strategies:

ADX > 25:

• Market is trending
• Use: Moving average crossovers, MACD, trend-following strategies
• Avoid: Oscillator reversals (RSI overbought/oversold)

ADX < 20:

• Market is ranging
• Use: Bollinger Band bounces, RSI reversals, support/resistance trading
• Avoid: Trend-following, breakout strategies

2. +DI and -DI Crossovers

While ADX shows strength, +DI and -DI show direction:

Bullish Signal:

• +DI crosses above -DI = Buyers taking control
• If ADX > 25, this is a strong buy signal

Bearish Signal:

• -DI crosses above +DI = Sellers taking control
• If ADX > 25, this is a strong sell signal

Weak Signals:

• Any crossover when ADX < 20 (no trend, ignore)

3. ADX Trend Confirmation

Rising ADX:

• Trend is strengthening
• Current positions: Hold and let them run
• New positions: Continue taking trades in trend direction

Falling ADX:

• Trend is weakening
• Current positions: Consider taking profits
• New positions: Be more selective

Flat ADX near bottom:

• Market in consolidation
• Wait for ADX to start rising before taking trend trades

When to Use ADX

• Best for: Filtering trending vs. ranging markets, confirming trend strength
• Timeframe: All timeframes, especially 1-hour and daily
• Strength: Objective trend measurement, prevents trading in choppy conditions
• Weakness: Lagging indicator, doesn't predict direction on its own

ADX Strategies

Strategy 1: ADX Filter

• Before entering any trade, check ADX
• If ADX < 20: Only take mean-reversion/range trades
• If ADX > 25: Only take trend-following trades

Strategy 2: DI Crossover with ADX Confirmation

• Wait for +DI/-DI crossover
• Check that ADX > 25 (trending)
• Enter in direction of crossover
• Exit when ADX starts falling or opposite DI crossover

Strategy 3: Ride Strong Trends

• Enter trade using your preferred method
• Hold as long as ADX > 30
• Exit when ADX drops below 25

Tips

1. ADX is a filter, not a signal — Use it to decide which strategies to employ
2. Wait for ADX > 25 — Don't trade trends when ADX is weak
3. Rising ADX = Green light — Trend is accelerating, add to positions
4. Falling ADX = Yellow light — Trend is weakening, tighten stops
5. Low ADX = Red light — No trend, avoid breakouts and trend trades

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2. Parabolic SAR (Stop and Reverse)

What It Is

Parabolic SAR provides entry and exit points by placing dots above or below price. It's designed to trail the price and signal reversals.

Creator: J. Welles Wilder Jr. (1978)

SAR stands for: "Stop And Reverse"

How It Works

Parabolic SAR appears as dots:

• Dots below price = Uptrend (bullish)
• Dots above price = Downtrend (bearish)

The dots accelerate (move faster) as the trend continues, which is why it's called "parabolic."

How It's Calculated

SAR(tomorrow) = SAR(today) + AF × (EP - SAR(today))

Where:
AF = Acceleration Factor (starts at 0.02, increases by 0.02 each time a new extreme is reached, max 0.20)
EP = Extreme Point (highest high in uptrend, lowest low in downtrend)

As the trend continues, AF increases, causing SAR to accelerate toward price.

Trading Signals

1. Basic Entry/Exit

Buy Signal (Go Long):

• Dots flip from above price to below price
• Enter long, place stop at SAR dot level

Sell Signal (Go Short):

• Dots flip from below price to above price
• Enter short, place stop at SAR dot level

Exit:

• Exit when dots flip to opposite side

"Stop and Reverse":

• When you exit a long, enter a short (and vice versa)
• Stay always in the market

2. Trailing Stop-Loss

Use Parabolic SAR as a dynamic trailing stop:

In Uptrend:

• Enter long using your method
• Place stop at SAR dot below price
• Move stop up as SAR moves up
• Exit when price touches SAR

In Downtrend:

• Enter short using your method
• Place stop at SAR dot above price
• Move stop down as SAR moves down
• Exit when price touches SAR

3. Trend Confirmation

Use SAR with other indicators:

Strong Uptrend Signal:

• SAR below price (bullish)
• Price above 50-day MA
• ADX > 25
• All aligned = strong trend, hold positions

Strong Downtrend Signal:

• SAR above price (bearish)
• Price below 50-day MA
• ADX > 25
• All aligned = strong downtrend

When to Use Parabolic SAR

• Best for: Trending markets, trailing stops, ride-the-trend strategies
• Timeframe: Works best on 4-hour, daily, and weekly charts
• Strength: Simple visual system, excellent trailing stop mechanism
• Weakness: Generates many false signals in ranging markets

Parabolic SAR Strategies

Strategy 1: SAR Flip (Always-In)

• Go long when SAR flips below price
• Go short when SAR flips above price
• Always be in a position
• Only use in trending markets!

Strategy 2: SAR + MA Filter

• Add 200-period MA to chart
• Only take long SAR signals when price > 200-MA
• Only take short SAR signals when price < 200-MA
• This filters out ranging market signals

Strategy 3: SAR as Trailing Stop Only

• Enter trades using your preferred method
• Use SAR only for trailing stop
• Don't take SAR flip signals for entry
• Exit when price hits SAR

Tips

1. Terrible in ranges — SAR whipsaws constantly in sideways markets
2. Great in trends — SAR excels at capturing and riding trends
3. Adjust acceleration — Slower AF (max 0.15) for less sensitive, fewer false signals
4. Combine with trend filter — Use ADX or MA to confirm trend before using SAR
5. Use as stop, not entry — SAR is better for exits than entries

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3. Pivot Points

What It Is

Pivot Points are price levels calculated from the previous period's high, low, and close. They provide potential support and resistance levels for the current period.

Origin: Floor traders in commodities and stock markets (pre-computer era)

How It's Calculated

Pivot Point (PP) = (Previous High + Previous Low + Previous Close) / 3

Resistance 1 (R1) = (2 × PP) - Previous Low
Support 1 (S1) = (2 × PP) - Previous High

Resistance 2 (R2) = PP + (Previous High - Previous Low)
Support 2 (S2) = PP - (Previous High - Previous Low)

Resistance 3 (R3) = Previous High + 2 × (PP - Previous Low)
Support 3 (S3) = Previous Low - 2 × (Previous High - PP)

Understanding Pivot Points

Pivot Points create a roadmap of potential price levels:

The Pivot Point (PP):

• Central level
• Price above PP = Bullish bias
• Price below PP = Bearish bias

Support Levels (S1, S2, S3):

• Potential bounce zones if price falls
• Order of strength: S1 > S2 > S3

Resistance Levels (R1, R2, R3):

• Potential rejection zones if price rises
• Order of strength: R1 > R2 > R3

Trading Signals

1. Pivot Point as Directional Bias

Bullish Bias:

• Price opens above PP
• Look for long opportunities
• Target R1, R2, R3
• Support at PP

Bearish Bias:

• Price opens below PP
• Look for short opportunities
• Target S1, S2, S3
• Resistance at PP

2. Support/Resistance Bounces

Buy at Support:

• Price drops to S1, S2, or S3
• Watch for reversal candles
• Enter long with stop below support level
• Target PP or R1

Sell at Resistance:

• Price rises to R1, R2, or R3
• Watch for rejection candles
• Enter short with stop above resistance level
• Target PP or S1

3. Breakout Trading

Bullish Breakout:

• Price consolidates below R1
• Price breaks above R1 with volume
• Enter long, target R2
• Stop below R1

Bearish Breakdown:

• Price consolidates above S1
• Price breaks below S1 with volume
• Enter short, target S2
• Stop above S1

4. Range Trading

When price is oscillating between levels:

Range Strategy:

• Buy at S1, sell at R1
• Buy at PP (if above), sell at PP (if below)
• Only works if price isn't trending

When to Use Pivot Points

• Best for: Day trading, intraday support/resistance, range trading
• Timeframe: Primarily intraday (calculate from daily data for intraday levels)
• Strength: Simple, widely watched (self-fulfilling), clear levels
• Weakness: Static levels (don't adapt), less useful in strong trends

Pivot Point Strategies

Strategy 1: Pivot Bounce (Range Trading)

• Price between S1 and R1
• Buy at S1, sell at R1
• Target opposite level
• Stop beyond S2 or R2

Strategy 2: Pivot Breakout

• Price breaking R1 or S1 with volume
• Enter in breakout direction
• Target next level (R2 or S2)
• Stop back inside broken level

Strategy 3: Pivot + Confluence

• Identify pivot level near MA, Fibonacci, or psychological level
• Wait for price to reach confluence zone
• Enter with confirmation
• Stronger signal due to multiple factors

Tips

1. Most useful intraday — Calculate from daily bars, use for intraday trading
2. Watch how price reacts — Pivot levels are probabilities, not guarantees
3. Combine with price action — Pivot + candlestick pattern = higher probability
4. R2/R3 and S2/S3 are stronger — The outer levels often mark major turning points
5. Widely watched — Many traders use pivots, creating self-fulfilling prophecies

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4. Fibonacci Retracement

What It Is

Fibonacci retracement levels are horizontal lines indicating where support or resistance is likely to occur, based on the Fibonacci sequence (0.236, 0.382, 0.500, 0.618, 0.786).

Origin: Leonardo Fibonacci (13th century), applied to markets in 20th century

The Fibonacci Levels

After a significant price move, retracements often occur at these levels:

• 23.6% = Shallow retracement
• 38.2% = Moderate retracement
• 50.0% = Midpoint (not technically Fibonacci, but widely used)
• 61.8% = "Golden ratio," most important level
• 78.6% = Deep retracement

How to Use Fibonacci

Drawing Fibonacci

In Uptrend:

• Draw from swing low to swing high
• Retracement levels appear below current price
• These become potential support levels

In Downtrend:

• Draw from swing high to swing low
• Retracement levels appear above current price
• These become potential resistance levels

Key Concept

After a strong move, price often "retraces" part of that move before continuing. Fibonacci levels show where these retracements are likely to end.

Trading Signals

1. Buy at Retracement (Uptrend)

Setup:

• Strong uptrend in place
• Price starts pulling back
• Wait for price to reach Fibonacci level

Entry:

• Price reaches 38.2%, 50%, or 61.8% retracement
• Watch for reversal signals (bullish candle, RSI divergence)
• Enter long
• Stop below next Fibonacci level
• Target previous high or higher

Most reliable: 61.8% level ("golden ratio")

2. Sell at Retracement (Downtrend)

Setup:

• Strong downtrend in place
• Price bounces up
• Wait for price to reach Fibonacci level

Entry:

• Price reaches 38.2%, 50%, or 61.8% retracement
• Watch for reversal signals (bearish candle, RSI overbought)
• Enter short
• Stop above next Fibonacci level
• Target previous low or lower

3. Fibonacci Extensions (Advanced)

After price completes a retracement and continues trending, extensions project potential targets:

Extension Levels:

• 127.2%
• 161.8% (most common)
• 200%
• 261.8%

Use these as profit targets.

When to Use Fibonacci

• Best for: Finding entry points in trending markets, profit targets
• Timeframe: All timeframes, especially 4-hour and daily
• Strength: Natural price behavior, widely watched, works surprisingly well
• Weakness: Subjective (where to draw from/to), not always accurate

Fibonacci Strategies

Strategy 1: Fib + Confirmation

• Identify strong trend
• Wait for pullback to 61.8% level
• Wait for bullish reversal candle + RSI oversold (in uptrend)
• Enter, stop below 78.6% level

Strategy 2: Multiple Fib Confluence

• Draw Fibonacci from multiple swings
• Find where 61.8% levels overlap
• These "confluence zones" are stronger support/resistance
• Trade the bounce with tighter stops

Strategy 3: Fibonacci + Support/Resistance

• Identify key horizontal support/resistance
• Draw Fibonacci from recent swing
• If Fib level aligns with S/R level, it's much stronger
• Wait for price to reach confluence, then trade the reaction

Tips

1. Use on clear swings — Fibonacci works best on obvious, strong trends
2. 61.8% is most important — The golden ratio is the most reliable level
3. Combine with other tools — Fib + support/resistance + RSI = powerful combo
4. Not exact — Think of levels as zones, not exact prices
5. Practice drawing — It's subjective; practice makes perfect

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5. Ichimoku Cloud

What It Is

Ichimoku Cloud is a comprehensive indicator that shows support/resistance, trend direction, and momentum — all in one glance.

Creator: Goichi Hosoda (Japan, 1960s)

Name meaning: "One-glance equilibrium chart"

Components

Ichimoku has five lines:

1. Tenkan-sen (Conversion Line) — (9-period high + 9-period low) / 2 — Fast line, like 9-period MA
2. Kijun-sen (Base Line) — (26-period high + 26-period low) / 2 — Slow line, like 26-period MA
3. Senkou Span A (Leading Span A) — (Tenkan + Kijun) / 2, plotted 26 periods ahead
4. Senkou Span B (Leading Span B) — (52-period high + 52-period low) / 2, plotted 26 periods ahead
5. Chikou Span (Lagging Span) — Close plotted 26 periods back

The "Cloud" (Kumo) is the space between Senkou Span A and Senkou Span B.

Understanding Ichimoku

It looks complex, but focus on these key elements:

The Cloud:

• Price above cloud = Uptrend, cloud acts as support
• Price below cloud = Downtrend, cloud acts as resistance
• Price in cloud = No clear trend, consolidation

Cloud Color:

• Green/bullish cloud = Span A above Span B
• Red/bearish cloud = Span B above Span A

Tenkan/Kijun:

• Tenkan above Kijun = Bullish
• Tenkan below Kijun = Bearish

Trading Signals

1. Cloud Breakout

Bullish Breakout:

• Price breaks above cloud with momentum
• Enter long
• Cloud becomes support
• Hold until price re-enters cloud

Bearish Breakdown:

• Price breaks below cloud with momentum
• Enter short
• Cloud becomes resistance
• Hold until price re-enters cloud

Strongest: When cloud is thin (little resistance)

2. Tenkan/Kijun Cross (TK Cross)

Bullish TK Cross:

• Tenkan crosses above Kijun = Buy signal
• Especially strong if occurring above cloud

Bearish TK Cross:

• Tenkan crosses below Kijun = Sell signal
• Especially strong if occurring below cloud

3. Chikou Span Confirmation

For additional confirmation:

Bullish:

• Chikou Span above price 26 periods ago
• Confirms uptrend strength

Bearish:

• Chikou Span below price 26 periods ago
• Confirms downtrend strength

4. Kumo Twist

When the cloud changes color (Span A and B cross):

Bullish Kumo Twist:

• Cloud changes from red to green = Potential trend reversal up

Bearish Kumo Twist:

• Cloud changes from green to red = Potential trend reversal down

When to Use Ichimoku

• Best for: Comprehensive trend analysis, all-in-one system
• Timeframe: Daily and weekly charts (originally designed for daily)
• Strength: Complete system, shows multiple factors at once
• Weakness: Looks complicated, takes time to master

Ichimoku Strategies

Strategy 1: Simple Cloud Trade

• Only take longs when price above cloud
• Only take shorts when price below cloud
• Don't trade when price is in cloud
• Use cloud edge as stop-loss

Strategy 2: TK Cross + Cloud Confirmation

• Wait for Tenkan/Kijun cross
• Confirm price is on correct side of cloud (above for long, below for short)
• Enter on cross
• Stop beyond cloud

Strategy 3: Full Ichimoku System

• Wait for TK cross
• Price must be on correct side of cloud
• Chikou Span must confirm
• Cloud ahead should be thin (easier breakout)
• All align = very high probability trade

Tips

1. Start simple — Focus on cloud position first, add other components later
2. Best on daily+ — Ichimoku was designed for daily charts
3. Cloud thickness matters — Thin cloud = weak resistance, thick cloud = strong
4. Use all components — The power of Ichimoku is in combining all five lines
5. Be patient — Wait for all conditions to align

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Choosing the Right Trend Tool

Indicator	Shows	Best For	Difficulty
ADX	Trend strength	Filtering trending/ranging markets	Easy
Parabolic SAR	Trend direction	Trailing stops, riding trends	Easy
Pivot Points	Support/Resistance	Day trading, intraday levels	Easy
Fibonacci	Retracement levels	Pullback entries, profit targets	Medium
Ichimoku	Complete system	Comprehensive trend analysis	Hard

Quick Selection Guide

• Start with ADX — Learn to identify trending vs. ranging markets first
• Add Parabolic SAR — Use as a trailing stop mechanism
• Use Pivot Points for day trading — Quick intraday support/resistance
• Learn Fibonacci — Excellent for timing entries in trends
• Master Ichimoku later — Powerful but complex, save for when you're experienced

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Next Steps

Now that you understand trend analysis tools:

1. Use ADX as a filter — Check ADX before taking any trend trade
2. Practice Fibonacci retracements — Draw Fibs on historical trends
3. Try Parabolic SAR as trailing stops — Protect profits in trends
4. Explore Ichimoku — Open a chart with Ichimoku and observe for a week
5. Build a trend-following strategy — Combine ADX + MA + RSI

You've now learned all five categories of technical indicators! In the final section, we'll discuss how to combine indicators effectively and avoid common pitfalls.