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Whale Trading

Trend Indicators: Reading MA, MACD, Ichimoku, and DMI/ADX in Context

In this chapter we focus on trend indicators:

  • Moving Averages (MA)
  • MACD
  • Ichimoku Cloud
  • DMI/ADX
  • PSAR

Tools almost every trader has put on a chart at some point.

The goal is not:

“A golden cross happened, therefore buy,”

but rather:

“What does this trend indicator say
inside the current market structure,
and how far can I trust it?”

The diagram below shows one price chart with:

  • top: price + moving averages (MAs)
  • middle: MACD panel
  • bottom: ADX (trend strength) panel

arranged in separate layers.

This setup lets you:

  • use MAs for direction and regime,
  • MACD for momentum turns, and
  • ADX for trend strength.

1. What Are Trend Indicators? – Summarizing Direction and Strength

Trend indicators are designed to:

  • process price data into averages, differences, and ratios, and
  • tell you whether the market is closer to
    • uptrend, downtrend, or range,
    • and how strong or weak that trend is.

They are strong at:

  • describing the overall environment,

and weak at:

  • calling exact tops and bottoms.

In practice they help answer:

  • “Is this a trend-following environment or not?”
  • “Should I be leaning with the main move,
    or thinking more in range/mean-reversion terms?”

2. Moving Averages (MA): The Basic Trend Framework

2-1. How MAs Frame the Market

A moving average takes:

  • the average of closing prices over N periods,
  • plots it as a line,
  • and you read slope and relative position.

Example:

  • short-term MA (e.g. 20MA) sloping up,
  • price holding above that MA,

→ basic ingredients of a short-term uptrend.

The diagram compares:

  • uptrend: short > mid > long, all sloping up,
  • range: MAs tangled and mostly flat,
  • downtrend: long > mid > short, all sloping down.

2-2. Three Things to Check with MAs

Across timeframes (see timeframes):

  1. Slope

    • Look not just at “above/below,”
      but how steeply the MA is rising or falling.

  2. Stacking

    • clean uptrend: short > mid > long
    • clean downtrend: long > mid > short
      These aligned phases often coincide with persistent trends.

  3. Distance from price

    • When price is far above/below its MAs,
      reversion risk tends to be higher in the short term.

2-3. Limits and Pitfalls of MAs

  • In ranges/sideways markets, MAs will frequently cross and recross,
  • producing a series of failed golden/death crosses.

In other words:

In non-trending markets,
trend indicators themselves become noise.

3. MACD: A Combined Trend and Momentum View

MACD is essentially:

  • the difference between a fast and slow EMA,
  • compared to a signal line (MA of that difference).

3-1. Key MACD Components

Common elements:

  • MACD line: fast EMA – slow EMA
  • Signal line: MA of MACD line
  • Histogram: MACD – signal

Patterns traders often watch:

  1. Above/below the zero line

    • above 0 → bullish pressure dominant,
    • below 0 → bearish pressure dominant.

  2. Crosses relative to the zero line

    • Bullish cross above zero:
      potential trend acceleration in an uptrend.
    • Bearish cross below zero:
      potential acceleration in a downtrend.

  3. Histogram contraction/expansion

    • shrinking histogram:
      trend losing strength or preparing to turn.
    • expanding histogram:
      new move gaining strength.

3-2. Why You Should Not Overtrust MACD

  • MACD is based on MAs and thus
    • inherits the same problems in choppy markets.
  • In tight ranges it can whipsaw up and down,
    • generating many false crosses.

Treat it less as:

  • a “perfect entry trigger”,

and more as:

a tool to say “momentum is shifting”
in the context of a structure you already understand.

4. Ichimoku Cloud: A Multi-Component Trend System

Ichimoku:

  • combines conversion line, base line,
  • leading spans A/B (cloud),
  • and lagging span

into a composite trend system.

We won’t go into full parameter detail here,
but focus on the main ideas.

4-1. Core Ichimoku Readings

Typical checks:

  1. Price vs Cloud

    • price above the cloud,
    • cloud thick and rising
      → classic strong uptrend conditions.

  2. Conversion vs Base line

    • conversion above base, both rising
      → short- and medium-term trends aligned.

  3. Lagging span

    • lagging span above price and cloud
      → trend structure relatively clean.

4-2. Practical Cautions with Ichimoku

  • With many components on screen, it’s easy to feel visual overload at first.
  • You don’t need every rule at once.
    Even just:
    • “price vs cloud” and
    • “conversion vs base line”
  • can already give a usable trend framework.

5. DMI/ADX and PSAR: Trend Strength and Trailing Stops

5-1. DMI/ADX: Measuring Trend Strength

DMI/ADX shows:

  • +DI / -DI: directional movement up vs down,
  • ADX: the strength of that directional move.

Common patterns:

  • ADX low (e.g. below 20):
    potential range/no-clear-trend environment.
  • ADX rising above 20–25:
    trend strength building up.

5-2. PSAR: Trend-Following Style Stop Guide

PSAR (Parabolic SAR):

  • plots dots that act as a trailing stop suggestion.
  • dots below price → trend-following long stop region,
  • dots above price → trend-following short stop region.

However:

  • in highly volatile periods, PSAR can flip frequently,
  • leading to overly tight and reactive stops.

It’s usually better to treat PSAR as:

  • a visual guide alongside
  • the position sizing and stop rules
    from risk-management,

rather than as the sole stop logic.

6. How to Combine Trend Indicators (Minimal Setup)

One common practical workflow:

  1. Define environment (trend vs range)

    • use MA stacking + ADX
    • to answer: “trend or range right now?”

  2. Define direction

    • use highs/lows + MA slope
    • to confirm basic bullish vs bearish structure.

  3. Check momentum

    • use MACD (or Ichimoku conversion/base)
    • to see whether momentum is accelerating or fading.

  4. Shape risk and stops

    • use ATR/ADR and recent volatility
    • to size stops and positions
      within risk-management.

Key point:

You don’t need many indicators;
you need a few non-overlapping roles.

7. Checklist for Using Trend Indicators in Live Trading

Before acting on a trend indicator, ask:

  1. “Is this market trending or ranging?”

    • judge via MA alignment, ADX,
      and basic swing/high-low structure.

  2. “Which timeframe am I reading?”

    • decide which structure (5m / 1h / 4h / daily)
    • your indicator reading belongs to
      (see timeframes).

  3. “What if price and indicator disagree?”

    • if indicators say “uptrend”
    • but price is clearly in a choppy range,
    • prioritize price structure.

  4. “Does this signal fit my risk rules?”

    • if the setup demands risk outside your risk-management plan,
    • it may simply not be your trade,
      even if the indicator looks attractive.

In the next chapter,
oscillators, we’ll cover:

  • RSI, Stochastics, CCI and other oscillators,

and treat them primarily as:

tools for locating swings within trends,
rather than standalone reversal signals.