Ask Colin

Which one indicator is best to identify strongly trending markets?

I think you have arrived at the point most of us reach sooner or later. This is that it is the simple, but bullet-proof ideas that work, not the various indicators that surround the periphery of the main game. By this, I mean that there are very basic ideas of how markets work and how you detect the balance of buyers and sellers. Trend is just an expression of this balance - or imbalance, if you like, because trends occur when one side is in control.

Now I will shock you, as I do for most of my students - I do not use any indicators. Sure, I write about them in articles, but that is because I have readers that wish to learn about them or to see examples of their use. I can use them, but for my own work I don't really need them.

My basic approach is to buy breakouts above a broad trading range. Then I hold my position while ever the trend, defined as higher peaks and higher troughs remains in place. Clearly, the strongest trends will have the steepest rates of ascent. However, beware: sometimes these are like sky-rockets they take off and rise fast, but soon burn out. Most of the time it is the more sedate trends that have the staying power.

Although I can trade happily without indicators, I have found two indicators to be useful once a trend is established. One is the 260-day moving average (which may be used on weekly data as a 52-week moving average or on monthly data as a 12 month moving average). The strongest trends will tend to run above the moving average most of the time. The slower (though they can be just as rewarding) trends tend to chop back and forth across the moving average.

The other useful indicator is the monthly MACD. Where it stays in buy mode consistently, or where the MACD line only