Indicator Throw Down: Trend-Tracking Vs Range-Based

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I’m a longtime disciple of technical analysis and use it almost exclusively in my trading, which is why I am so glad it’s becoming a more mainstream tool for investors. But despite its growing popularity, there are still some misconceptions about which types of indicators work best in different market environments.

Most technical indicators fall into one of two categories: trend-following or range-based.

Trend-following indicators, as the name indicates, are designed to take advantage of trends in the market or an individual stock. Examples include moving averages, the average directional index (ADX), and on-balance volume (OBV).

Range-based indicators are mostly designed to show overbought and oversold conditions in a price range and include Bollinger Bands, the Commodity Channel Index (CCI), the Relative Strength Index (RSI), and stochastics. Some indicators, like the moving average convergence divergence (MACD), can be used to generate either a trend-following or a range-based trade signal depending on the time periods used in its calculation.

Related Link: Beyond VIX: More Ways To Monitor The Stock Market's Mood

Let’s take a look at how both types of indicators can be effective in different sample market conditions and time frames using the charting tools on the thinkorswim® platform from TD Ameritrade. Take a look at the following figures and their descriptions.

Can these indicators sometimes work in combination? You bet. Both trend-following and range-based indicators can work on shorter time frames as well, such as those used for day trading.

There are a wide variety of trend-following and range-based indicators available on the thinkorswim platform. Understanding how they work, and more importantly, when to use them, can help you fine-tune your trading and potentially improve your winning percentage.

This piece was originally posted here by Brian Lund on May 26, 2015.

This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

The discussion of specific securities is not intended to be a recommendation to buy, sell, or hold a specific security.

Past performance of a security or strategy does not guarantee future results or success.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2015 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

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Posted In: OpinionBrian LundThe Ticker Tape
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