Flaws In Using Conventional Signal Indicators
In Strong Trends and Alternative Strategies
Ian Y.H. Chua
1, 2, 3, 4
5 March 2025
Introduction
Technical indicators such as the Relative Strength Index (RSI), Moving Averages (MA),
Moving Average Convergence Divergence (MACD), Bollinger Bands, and On-Balance
Volume (OBV) are widely used by traders to determine entry and exit points in nancial
markets. However, these indicators are primarily designed for mean-reverting markets
rather than strong trending markets.
These indicators often generate overbought signals in a strong uptrend, prompting
traders to sell too early or short the market—leading to missed prots or direct losses.
Conversely, in a strong downtrend, they indicate oversold conditions, causing traders
to buy prematurely, leading to further losses as the price continues to decline. This
paper explores the aws of conventional indicators in trending markets, presents
alternative indicators that measure trend strength, and proposes superior trading
strategies.
Flaws in Conventional Indicators During Strong Trends
1. Relative Strength Index (RSI)
• Flaw: RSI signals overbought (>70) and oversold (<30) levels, assuming a price
correction will follow. However, in strong trends, the RSI can stay above 70
(uptrend) or below 30 (downtrend) for extended periods, misleading traders into
counter-trend trades.
• Example: Bitcoin’s price in a bull run often maintains RSI values above 70 for
weeks, leading to premature exits and lost prots.
2. Moving Averages (MA) and MACD
• Flaw: MA and MACD lag behind price action, generating delayed signals. Traders
exiting when a short-term MA crosses below a long-term MA in an uptrend may
miss signicant upside movement.
• Example: A trader following a 50-MA vs 200-MA crossover may sell during
temporary pullbacks, only to see the price continue upwards.
3. Bollinger Bands
• Flaw: In strong trends, price rides the upper band (uptrend) or lower band
(downtrend) rather than reverting to the mean. Selling at the upper band or buying
at the lower band causes premature exits.
• Example: Tesla stock during a parabolic uptrend in 2020 frequently stayed above
the upper Bollinger Band, making it ineective for shorting.
4. On-Balance Volume (OBV)
• Flaw: OBV assumes volume precedes price movement, but in strong trends, price
may continue without a proportional volume increase.
• Example: A stock experiencing a strong uptrend due to sustained institutional
buying may continue higher even with at OBV readings.
Indicators and Metrics That Conrm a Strong Trend
To avoid the pitfalls of conventional indicators, traders should use trend-conrming
indicators instead of mean-reverting signals.
1. Average Directional Index (ADX)
• Why It Works: ADX measures trend strength, with values above 25 indicating a
strong trend.
• Buy/Sell Strategy:
o If ADX > 25 and +DI (Directional Indicator) > -DI, trend is bullish → Stay
long.
o If ADX > 25 and -DI > +DI, trend is bearish → Stay short.
2. Trend-Based Moving Averages (Hull MA or Anchored VWAP)
• Why It Works: Hull MA reacts faster to price than simple MAs, reducing lag.
Anchored VWAP adjusts dynamically based on trend.
• Buy/Sell Strategy:
o Price above Hull MA conrms an uptrend → Look for buying
opportunities.
o Price below Hull MA conrms a downtrend → Look for shorting
opportunities.
3. Rate of Change (ROC) with Trend Conrmation
• Why It Works: ROC measures price momentum, allowing traders to detect when
trends accelerate or slow down.
• Buy/Sell Strategy:
o If ROC > 0 and rising, momentum is increasing → Stay in the trade.
o If ROC turns negative, trend is losing strength → Consider taking prots.
4. Higher Timeframe Conrmation
• Why It Works: Strong trends persist across multiple timeframes. Using weekly
or daily trends prevents false exits.
• Buy/Sell Strategy:
o Only take trades aligned with the higher timeframe trend.
o Example: If weekly trend is up, avoid short trades even if RSI signals
overbought on an hourly chart.
Best Trading Strategies in Strong Trends
1. Trend-Following with ADX & Moving Averages
• How It Works:
o If ADX > 25 and price is above the Hull MA, the trend is strong → Stay in the
trade.
o If ADX drops below 20, trend is weakening → Take partial prots.
• Why It’s Better: Avoids selling too early when conventional indicators show
overbought conditions.
2. Trend-Riding Bollinger Bands Strategy
• How It Works:
o Instead of selling when price hits the upper Bollinger Band, wait for a
close below the band.
o Buy dips when price touches the middle Bollinger Band in an uptrend.
• Why It’s Better: Avoids false exits while staying in the strong trend.
3. RSI Trend Zone Strategy
• How It Works:
o Instead of using RSI 70/30, consider RSI 50 as a bullish/bearish
threshold.
o If RSI remains above 50, trend is intact → Stay long.
• Why It’s Better: Prevents premature exits during strong uptrends.
Conclusion
Conventional indicators such as RSI, MA, MACD, Bollinger Bands, and OBV are awed
in strong trends because they assume mean reversion rather than trend continuation.
Traders who rely on these indicators may exit too early or enter counter-trend trades,
leading to missed opportunities and losses.
To trade eectively in strong trends, traders should use trend-conrming indicators
such as ADX, Hull MA, ROC, and higher timeframe conrmation. Strategies that
incorporate these metrics provide higher probability trades, better risk management,
and improved long-term protability.
By understanding and adapting to market trends, traders can avoid common pitfalls and
maximize their prots in trending markets.
Acknowledgments
This paper was developed with the assistance of ChatGPT 4.0, which provided insights and renements in the
articulation of philosophical and scientic concepts.
1
Founder/CEO, ACE-Learning Systems Pte Ltd.
2
M.Eng. Candidate, Texas Tech University, Lubbock, TX.
3
M.S. (Anatomical Sciences Education) Candidate, University of Florida College of Medicine, Gainesville, FL.
4
M.S. (Medical Physiology) Candidate, Case Western Reserve University School of Medicine, Cleveland, OH.