Which indicators will help you clarify whether the market is trending or range bound? The most commonly used indicators are:
- Average Directional Movement indicator (ADX)
- Bollinger Bands
- Momentum indicator.
ADX measures the the strength or weakness of the general market trend and produces a number from 0-100 that indicates price direction. Traders generally agree that
readings below 20 indicate that the currency price is range-bound and
readings above 25 tell us the price is trending.
Regarding
Bollinger Bands, traders look at the width between the bands to gauge the extent of price movement. Bands that are relatively far apart signal that the average price over a given number of days is
flunctuating signifcantly: The currency is probably
trending. If the bands are
narrow, there is less volatility in price movement and the currency is
range-bound.
A third way to determine a market's behavior is to use the
momentum indicator. As a mesaure of volatility, the mometum indicator simply subtracts the closing price a given number of days ago from the last closing price - indicating the rate of change in price over a given period of time.
These values begin at zero and track a currency's tendency to move in a given direction. A momentum line that
rests near zero for a long time OR frequently
bounces above and below it means the currency is
range-bound.
A momentum line that
stays above or below zero for long periods of time means the market is
trending.