What indicators are best for trend following?

The best indicators for trend following are simple. So simple that new traders ignore them because they feel too basic.

**Moving averages (trend direction):**

The 50-day moving average is the most-used trend indicator. When price is above it, the trend is up. When price is below it, the trend is down.

How it works: Add the last 50 closing prices and divide by 50. That's your moving average. Draw a line through them. Price above the line = uptrend. Price below = downtrend.

Real example: - A stock's 50-day moving average is $100 - Price is at $105 (above the MA) - The trend is up - You look for entries (breakouts, support bounces) - You don't short

If price drops below the 50-day MA ($100), the trend changed. You stop looking for long entries. You start looking for short entries or you exit.

Why 50 days? Because it's long enough to filter noise but short enough to recognize when the trend actually changes. A 200-day MA is slower (better for longer trades). A 20-day MA is faster (better for shorter trades).

**Exponential moving average vs simple moving average:**

Simple MA: Treats all 50 days equally. Exponential MA: Recent days matter more than old days.

For trend following, exponential is slightly better because recent price action matters more than old price action. But the difference is small. Use whichever one your charting software makes easy.

**ATR (stop loss distance):**

ATR is volatility. High ATR = stock moves big. Low ATR = stock moves small.

Use ATR to set stop losses. Instead of guessing "$1 stop loss," use ATR.

Example: A stock has a 14-period ATR of $2. You buy above resistance. Your stop loss is 2 ATRs below entry: $2 × 2 = $4 below.

If ATR is $2 and you put a $1 stop loss, it gets hit constantly by normal volatility. If ATR is $2 and you put a $10 stop loss, you're risking too much.

ATR-based stops are always appropriate to the stock's volatility. This is why they work better than fixed dollar amounts.

**Donchian channels (breakout levels):**

Donchian is the highest high and lowest low over the last N periods.

Example: The last 20 days, the highest price was $105 and the lowest was $90. The Donchian high is $105 and the Donchian low is $90.

If price breaks above $105 (Donchian high), that's a breakout. If price breaks below $90 (Donchian low), that's a breakdown.

Donchian is useful because it defines the range price has traded in. Breaking outside that range means something changed. The breakout is more likely to be real.

Some traders use 20-period Donchian, others use 52-period (1 year). Longer periods = fewer breakouts but more reliable. Shorter periods = more breakouts but more false.

**MACD (momentum confirmation):**

MACD shows momentum direction. Rising MACD = momentum building. Falling MACD = momentum fading.

Use MACD to confirm trend direction, not as a primary signal.

Good setup: Price above 50-day MA (trend up) + MACD rising (momentum up). This is strong. Bad setup: Price above 50-day MA (trend up) + MACD falling (momentum fading). This often means the trend is ending.

MACD is a confirmation tool, not a decision tool.

**Bollinger bands (volatility/support):**

Bollinger bands show support and resistance based on volatility. As volatility increases, the bands widen. As it decreases, they tighten.

Use them to identify support (lower band) and resistance (upper band). When price touches the lower band, it's often a bounce. When price touches the upper band, it's often a pullback.

Useful for finding entries within a trend. In an uptrend, price bounces off the lower band = buy opportunity.

**What NOT to use:**

Avoid RSI, Stochastic, and other "overbought/oversold" indicators. These are for mean reversion. For trend following, they give false signals.

In an uptrend, RSI stays high (overbought) for weeks. A mean reversion trader shorts "overbought" and gets destroyed. A trend follower ignores RSI and makes money.

Avoid complex indicators that require explanation. If you can't explain it in one sentence, don't use it.

**The indicator framework for trend followers:**

Primary indicator: Moving average (trend direction) Stop loss tool: ATR (volatility-based stops) Entry tool: Donchian channels (breakouts) or support/resistance (bounces within trend) Confirmation: Volume, MACD if needed

That's it. This is sufficient. Traders who use 10 indicators don't make more money than traders who use 3. They just have more things to second-guess.

**The real power of indicators:**

Indicators don't predict. They confirm what already happened. Your job is noticing what already happened and trading it.

A moving average crosses above price = trend started changing upward. You see it. You buy. You make money.

An indicator predicting the future = fantasy. Stick to what happened.