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Friday, November 26, 2010

Top Ten Technical Indicators

New and Experienced traders are always searching for the latest and greatest technical indicators. They scour the internet reading every blog by the Current Guru explaining why their technical indicator is the best. They spend hours on hours reading and learning all the trade rules for each indicators. To what avail? Usually, they've learn so much that the indicators are conflicting and the trader is unable to pull the trigger.
I have always said that it is not about market knowledge or technical indicators. A good trader learns how to control his/her emotions by developing a personalized trading plan. A good trade is one entered and exited based upon rules and conditions - regardless of the outcome. Until a trader learns how to control their emotions and make sound trading decisions based on rules, they are doomed to make the same portfolio killing decisions of follow the latest guru. There is no success there. That guru will not be the one to place the trade for you. You MUST learn how to pull the trigger yourself.
So, with that said, here are myTop Ten Technical Indicators:
1. Price - I personally think price action ( I use japanese candle patterns) along with moving average and support and resistance. I try to go with the trend and identify the path of least resistance is where I want to be.
2. Volume - One of the best indicators of the conviction of traders. Volume ,placed in context with price movement, allows me to trade effectively. To measure the significance of volume, we need a baseline. What I am looking for is the % change over an average day.
3. Support and Resistance - I use support and resistance for entries and exits, as well as for clues about where the market is going. But support and resistance trading never becomes obsolete, because support and resistance levels are caused by human nature. They are a natural occurrence in all liquid markets, they always have been and they always will be.
4. Moving Averages - Moving averages are one tool to help you detect a change in trend. They measure buying and selling pressures under the assumption that no commodity can sustain an uptrend or downtrend without consistent buying and selling pressure.
5. Market Internals - For me the internals can help to show direction but what is important is to see how the internals are acting at key price levels. They will help you to confirm rejection or acceptance at support/resistance. Breadth can be used to see underlying strength or weakness. The up/down volume seems to give a broad sense of the market.
6. Bollinger Bands - First and foremost, bollinger bands are great tools to identify period of high and low volatility for a stock. I also like to use Bollinger Bands to confirm/identify a stock's trend. In conjunction with a moving average, you can use the bands to identify support and resistance.
7. ADX (DMI + / -) - The ADX indicator measures the strength of a trend and can be very useful to determine if a trend is either strong or weak. High readings indicate a strong trend and low readings indicate a weak trend. You want to be in stocks with high readings whether the underlying stock is in an uptrend or downtrend. When this indicator is showing a low reading, the underlying stock is probably about to establish a trading range (consolodation period). Avoide stocks with low readings!
8. Stochastics - When the market is trending is necessary to adapt the oscillator to the same conditions: When the market is trending up, then the signals with the higher probability of success are those in direction of the trend "Buy signals", on the other hand when the market is trending down, selling signals offer the lowest risk opportunities. Divergence trades are amongst the most reliable trading signals. A divergence occurs either when the indicator reaches new highs/lows and the market fails to do it or the market reaches new highs/lows and the indicator fails to do it. Both conditions mean that the market isn't as strong as it used to be giving us opportunities to profit from the market.
9. Relative Strength Index (RSI) - A great leading indicator to time your trading signals. A stock is overbought if the RSI shows a level above 70. A stock is oversold if the RSI shows a level below 30.
10. Moving Average Convergence Divergence (MACD) - MACD is a trend following momentum indicator. It also does a good job of finding a reversal in trends. The most simple way to use the MACD is to look for a crossover of the moving averages. When the MACD line crosses to the upside that is a bullish signal, conversely when the MACD line crosses to the downside that is a sell signal.

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