Searching For the Holy Grail
Most technical indicators highlight a specific aspect of price or volume behavior. Newcomers usually attach mystical significance to their favorite indicators, however none are infallible. Technical indicators are ideal for stock-screening, but, if possible, base final decisions on the price chart.
Keep It Simple
Select a small number of indicators (2 or 3) and use them to confirm signals from each other.
Know Your Indicators
Study their behavior till you recognize them well. Indicators are similar to the tools of a carpenter: skilled use will produce wonderful results; unskilled use can result in to injury.
Use Contrasting Indicators
Select indicators that complement each other and aren't based on the same data. For instance, three indicators based on closing price will tend to confirm one another; whereas indicators based respectively on closing price, volume and trading range are often conflicting and are therefore more reliable after they do confirm each other.
Trending & Ranging Markets
No one indicator is suitable for all market conditions. Trend indicators lose money throughout a ranging market, as fluctuations in a narrow price range whipsaw traders in and out of positions. In a trending market, momentum oscillators provide exit signals too early and should only be used to confirm trend indicators.
Trend Indicators
Use a trend indicator in an extended time frame than the cycle being traded (e.g. if trading the secondary cycle, use a 100-day exponential moving average to indicate the direction of the primary trend).
The Trend Is Your Friend
Only trade within the direction of the trend as indicated by the moving average.
You may check the charts for free at AM Financial's demo MT4 platform by registering here.
Posted on: Wednesday, 30 November, 2011.
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