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Financial markets are notoriously fickle. Trying to time the market is a difficult task that few non-professional investors do with repeatable success. Still, there are some ways to make more educated investment picks based on publicly available data.

Once an investor selects which securities to buy, how do they decide a good price to enter into a trade at? One of the simpler ways to make a more informed decision regarding when to buy or sell a stock involves using trend indicators.

Trend indicators give investors a sense about which direction the market has moved and for how long it has been heading that way. Trend analyses aim to anticipate futures based on previous patterns in buying, selling, and pricing over time.

Understanding Trend Indicators

Trend indicators are an aspect of technical analysis. Technical analysis uses either computer-generated mathematical information (indicators) or looking for visible patterns in the charts of stock prices.

This investment approach isn’t guaranteed and doesn’t always boost investors’ returns. But, trend analysis can provide investors with one way to try to appraise the market’s next move.

Although technical analysis involves the use of objective data rooted in mathematics and historical price movements, this kind of analysis also relies on human interpretation of that data.

So, it can be said that using indicators and patterns involves aspects of both art (aka interpretation and intuition) and science (aka data and math).

Commonly Used Trend Indicators

Here’s an overview of five commonly used trend indicators that investors may want to look into:

1. Moving Averages

A “moving average” (aka MA) is defined as the mean of time series data. In finance, this technical trading term means the average price of a security (aka a monetary instrument, like stocks, with monetary value)—as calculated over a certain timeframe.

When prices begin trading above a moving average, this can sometimes be seen as a bullish signal, but doesn’t always produce reliable returns over time. A much stronger signal comes when two moving averages of different time lengths cross paths.

When a shorter-time-frame moving average crosses above a longer-time-frame moving average, the move is referred to as a “golden cross.” The general consensus among traders is that the most significant golden cross involves the 50-day MA moving above the 200-day MA. Put another way, it’s when a security’s short-term average is heading above it’s long-term valuation average.

While a single moving average can convey some important information, MAs can be much more useful when used in conjunction with additional MAs of different lengths or with other trend-following indicators.

2. Relative Strength Index (RSI)

The Relative Strength Index (aka RSI) provides insight into whether a security might be overvalued or undervalued. This indicator oscillates between extremes, which is a fancy way of saying that it moves up and down.

The RSI is as straightforward as they come. It’s represented by a single line plotted on a graph with values that range from 0 to 100.

The higher the Relative Strength Index value, the more overbought a security is thought to be. In contrast, lower values are generally thought to indicate oversold conditions. So, for some investors, a low reading on the RSI could signal a potential buying opportunity.

Just how low should this indicator drop before it can be considered a buy signal? The answer to this question might depend on who you ask.

Fortunately, there is an easy way to estimate when the RSI becomes overextended in either direction. Between 30 and 70 is a shaded area sometimes called “the paint.” When the line breaches this zone, it’s thought that trading momentum in a given security has begun to reach its limits, and a trend reversal could be in the cards soon.

In other words:

•  an RSI reading of below 30 is generally thought to indicate oversold conditions, meaning prices could be getting ready to move higher sometime soon.
•  An RSI above 70 is generally thought to indicate overbought conditions, meaning a move downward could be coming soon.

As with most other trend following indicators, the RSI works best when used in conjunction with other metrics of a stock’s overall trading sentiment.

3. Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (aka MACD) illustrates the relationship between two moving averages. While the Relative Strength Index (aka RSI) noted above tracks changes in pricing in a single stock or asset (typically represented as a fluctuating line graph), the MACD shows two lines in addition to a histogram that indicates trend strength.

This indicator is used in a similar way as the RSI, although there is a little more information contained in the MACD. Both indicators are known as momentum indicators because they try to gauge the strength of a trend.

Whereas the RSI oscillates between 0 and 100 based on average price gains and losses over a set period, the MACD measures the relationship between two exponential moving averages.

Subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA is how the MACD is calculated. This calculation results in the MACD line. A nine-day EMA of the MACD, which is often referred to as the “signal line,” is shown on top of the MACD line. The lines are plotted atop a histogram meant to give traders an idea of momentum strength.

As with most trend indicators, there are multiple ways to interpret the MACD. One of the most common interpretations involves the MACD crossing its signal line.

A cross above the signal line is considered to be a potential buy signal, while a cross below the signal line is considered to be a potential sell signal.

4. On Balance Volume (OBV)

On balance volume (OBV) is a measurement of the selling and buying pressure on a given security. Volume gets added on up days and subtracted on down days.

On a day when the security closes at a higher price than its previous closing price, all of that day’s volume is considered upward volume. When the security closes lower than its previous closing price, that day’s volume is considered downward volume.

The numerical value of the OBV isn’t really important – it’s the direction that counts. Declining volume tends to indicate declining momentum and price weakness, while increasing volume tends to indicate rising momentum and price strength.

While the RSI is an indicator that signals bullishness when weak, OBV works in the opposite way. One of the most striking signs of a potential pullback in price can be seen using OBV. This can happen when the price of a security continues making higher highs even as OBV stalls or begins declining.

When this happens, it’s referred to as a negative divergence, and may mean that fewer traders are pouring money into a trade—potentially indicating that prices could start falling.

Here are a few other quick notes about OBV:

•  When both OBV and price make higher highs and higher lows, there’s a higher likelihood that the upward trend may continue.
•  When both OBV and price make lower highs and lower lows, it’s likely the trend could continue.
•  When prices are confined to a tight range, and OBV is rising, this may signal a period of accumulation. An upward breakout could be on the horizon.
•  When prices are confined to a tight range, and OBV is falling, this may signal a period of distribution. A downward breakout could be on the horizon.

5. Average Directional Movement Index (ADX)

The ADX is another trend indicator that aims to measure trend strength. It works by averaging the differences in price range over time. So, if an asset’s price barely move from day-to-day, the ADX will show a lower reading—while a big change in price will show a higher reading.

The Average Directional Movement Index is represented by a simple line graph beneath a stock chart. This trend line is even easier to use than most. It’s thought that an ADX above 25 indicates a strong trend and an ADX below 20 indicates little to no trend.

Here are some notes about potential ways to interpret the ADX:

•  When the ADX nosedives from a high point, it could signal a coming trend reversal.
•  A downward trend in the ADX could suggest that trends are dissipating overall. And, so, using any trend-following indicators could prove less reliable.
•  If the ADX rises by 5 points or more after a long period of staying low, this could be interpreted as a trade signal (a time to potentially buy or sell, depending on the direction of price movement).
•  A rising ADK generally means the market is entering into a stronger trend. The slope of the ADX line will be steeper when prices change faster. Steady, gradual trends tend to lead to a flattening of the ADX.

Keeping Tabs on Market Trends

There’s an old saying among traders—“the trend is your friend.”

Simply put, trends tend to keep moving in a certain direction when they have enough momentum. That’s why traders try to take note of them by studying trend-following indicators.

Trend indicators are a key way that many traders try to discern things like:

•  Which way a trend is moving
•  How strong that momentum is
•  How long the trend is likely to continue.

Some traders even go as far as trying to pick the exact time when a trend will change, using advanced strategies like options and futures contracts to try and profit from market volatility.

For most novice investors, adopting this kind of exact-timed technical strategy could prove highly risky, and might not always be necessary to earn returns over time. Individual investors might find it easier to use trend indicators to try determine when to buy and sell orders.

Whether an investor is brand new to the markets or has been building a portfolio for years, SoFi Invest® lets users take care of their investment needs in one secure app – including, trading stocks, buying crypto, and automated investing.

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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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There are plenty of reasons people don’t invest their money. Some of them are valid—for example, you probably shouldn’t invest a ton if you don’t have all of your high-interest credit card debt paid off. Or, if you’re planning to make a big purchase next year, you wouldn’t want to take the risk that comes with investing your savings.

But other reasons don’t quite make sense, and they’re often based on misconceptions about investing, or a lack of knowledge about the process. The truth is, if you have long-term financial goals, like buying a home, starting a business, or retiring someday, investing may get you there far more quickly than saving alone.

Here the most common reasons people drag their feet when it comes to investing—and why they might be holding you back.

Common Reasons People Avoid Investing

1. Saving Money in a Savings Account

Savings accounts pay you interest—but not a lot. The average savings account interest rate is only .01%, and the best rates out there hover around 1.7%. But, with the current inflation rate at 0.6%, all that money you’ve socked away in savings is actually losing money.

Yes, having money in savings is recommended for any cash you need to access immediately or don’t want to risk losing in the short-term. But for the rest of it? If you want it to grow, it may be a good idea to put it somewhere else.

2. Investing Later When They Have a Higher Salary

Let’s say you’re 25 years old and you hope to retire when you’re 65. (That may seem like forever, but ask any 65-year-old—it goes by in a flash.) If you save $5,500 a year and average 7% return per year (the average return on the S&P 500 from 1950-2009), you’d have a little over a million dollars.

If you wait until age 30 and do the same thing, you’d only have about $760,000. Start at age 40, and you’d only have about $348,000! If you’re reaching retirement age and want to have a million dollars before you retire, you’ll need to save much more each year to catch up to that goal. Want to see if you are on track? Consult SoFi’s article: Am I On Track For Retirement?

Many people think that it’ll be easier to save more when they’re older and making more money. And even if that is true, know that the earlier you start investing, the more time you have to weather the ups and downs of the market. Which brings us to:

3. Trying to Time the Market

It’s tempting to delay getting started because you think the market is too high, or you want to wait for stock prices to go down. The issue with that is, when the market does take a dip, most people fear it will go down more, so they continue to wait.

Few professional investors even try to time the market, and even fewer succeed. In reality, people who do try to time the market tend to buy at or near market tops and sell at or near market lows.

4. Investing is Too Risky

You might hear about the stock market going up or down by a number of points each day, and therefore assume it fluctuates too much for your taste. Market volatility is a reality, but there are ways to invest for every level of risk tolerance. Diversified retirement accounts, mutual funds, and ETFs, for example, all allow you to invest in a variety of assets in one fund.

Yes, financial crises have happened and chances are, they’ll happen again. But when you take a long-term view of our history, those crises are blips on the timeline.

Consider this: In the time period between 1929 and 2015 (when a whole lot of upswings and downturns happened), a diversified portfolio of 70% stocks and 30% bonds averaged 9.1% per year .

5. Investing is Intimidating

If you’re new to investing, it can be difficult to wrap your head around the concept. But the good news is, you don’t have to go at it alone.

A great place to start is investing for retirement in an employer-sponsored 401(k), an IRA, or (ideally) both.

Once you’re contributing the maximum possible to both of those accounts ($19,500 per year and $6,000 per year in 2020, respectively), you can consider opening a brokerage account, which lets you invest in stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs).

But you don’t even have to pick those investments yourself. A SoFi Invest® account makes it easy to get started. Our technology helps you set your financial goals and recommends the right investment strategy and level of risk to help you reach them within your desired time frame.

And our SoFi Invest Financial Planners help you plan for your future and answer any questions you have—absolutely free.

The bottom line: Investing is not just for the wealthy; it’s for anyone who wants to work toward achieving financial goals. Sounds like you? Well, it’s time to get started.

Not sure what the right investing account or investment strategy is for you? SoFi Invest financial planners are available to offer you complimentary, personalized advice. Consider working with a SoFi Invest advisor today.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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