So, how can we identify a trend?
MACD and moving averages have already been discovered as indicators capable of doing so.
At the expense of delayed entry, these indicators will detect trends once they have been formed.
The advantage is that there is less likelihood of being incorrect.
We’ve drawn the 10 EMA (blue), 20 EMA (red), and MACD on the GBP/USD daily chart.
The 10 EMA crossed above the 20 EMA around October 15, indicating a bullish crossover. Similarly, the MACD crossed upward and signaled a buy.
If you had entered a long trade at the time, you would have enjoyed the wonderful rise that followed.
Later on, the moving averages and MACD both provided sell signals.
And, based on the significant downtrends that occurred, taking those short positions would have resulted in massive winnings.
Those dollar signs are flashing in your eyes!
Let’s take a look at another chart to understand how these crossing indications can occasionally provide erroneous signals.
The MACD made a bullish crossover on March 15, while the moving averages supplied no hint. You just had a fakeout if you followed the buy signal from the MACD.
Similarly, at the end of May, the MACD’s purchase signal was not accompanied by any moving average crossover.
If you entered a long trade straight then, you might have put yourself up for a loss because the price fell a little after that.
Next Lesson: How to Trade using Chart Patterns
