7 Tips To Consider When Choosing Indicators

Stock Leading Indicators 

Stock Indicators are one of the most useful tools for Retail Traders. However choosing the right indicators for your Trading Style and strategies can be a daunting task because there are over 250 indicators available for stock, index, market, and options analysis. Most beginners simply use what they hear about in a weekend seminar, or read about on the internet. Unfortunately, just because an indicator is popular does not mean it is the best indicator for your Trading Style.

More often than not when a trader uses an indicator that is widely promoted, they are unknowingly setting themselves up for chronic mediocre profits and whipsaw trades. 
Here are 7 Tips To Consider When Choosing Indicators:

1. What Market Data is present and used in the formula? Traders do not need to be mathematicians or learn how to write indicators, but they do need to know what data is included in the indicator. Price and Time indicators tend to lag as Price must first move before the indicator can display the pattern in a line or histogram.  Volume and Time indicators in our automated marketplace tend to lead to some extent, due to how giant Institutions buy and sell. Volume, Price, and Time indicators are the new hybrid Stock Leading Indicators that are leading price, because they incorporate all of the market data into their formulas. Watch a webinar on these kinds of indicators for the current Stock Market.

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2. What is the Market Condition?  This is not the Uptrend or Downtrend, but the overall condition of the market which is derived from the Market Participant Cycle. There are 9 Market Participant Groups. Where, when, and how they buy or sell dictates which of the 6 Market Conditions is present at any given time. Usually a Market Condition will dominate from several weeks, to several months or longer. The Market Condition above all else, dictates what indicators will work ideally at that time.

3. What was the indicator writer’s intent?  This is critical to know because each writer developed their indicator based on a specific Market Condition that was present at the time. They saw Price and Volume behaving a certain way, and wrote an indicator to expose that pattern and what it meant for investing or trading.

4. What are the limitations of the indicator? Every indicator has strengths and weaknesses. As an example, it has been proven empirically that MACD only works during a Momentum Uptrend. It fails dismally for Selling Short, and creates whipsaw trades during Trading Range and Platform Market Conditions. Knowing the limitations helps traders avoid using that indicator in the wrong Market Conditions. Watch a webinar on how to improve MACD for today's Stock Market.

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macd stock indicator for stock trading webinar - technitrader

5. How old is the indicator or when was it written?  Indicators written 50 years ago were written for an entirely different Market Structure. On Balance Volume and Stochastic Indicators were written during a time when there were no Retail Traders, online brokers, or internet. There were no Pension Funds allowed to invest in the Stock Market. There were far fewer Institutions, and the Independent Investor only invested for the long-term. Therefore these older indicators were not designed for the automated marketplace, and are not appropriate for many modern Trading Styles and strategies.

6. Do High Frequency Trading Firms HFTs use the indicator in their algorithm strategies?  This is a huge factor many retail traders never consider. HFTs use the overly popular indicators such as MACD, Stochastic, or Moving Averages in their algorithms to find Cluster Orders that they can exploit on the millisecond time scale. Since Retail Traders are not allowed by law to trade on the millisecond scale and since their trading platforms do not show the millisecond tick or price, using these indicators is significantly higher risk. Cluster Orders are anomalies that form when many Retail Traders are all using the same indicator, trading strategy, trading system, or other popular entries. Cluster Orders are easily recognized by the HFTs algorithm and used to trade against the mass of Retail Traders all trading the same way.

7. Does the indicator expose where the giant Institutions are quietly accumulating?  With the largest institutions now using Dark Pool venues for their transactions, it is imperative that Retail Traders use indicators that reveal where the giant Institutions are quietly moving in or out of a stock. Specific indicators such as Balance Of Power BOP and Percent Shares Held By Institutions PSHI, can identify this important Market Participant Group.MACD Indicator for Stock Trading Webinar"

The chart example below shows quiet accumulation in the bottom chart window, of a stock prior to its Earnings Release.
chart example showing quiet accumulation in the bottom chart window - technitrader

Summary

Choosing indicators should not be about using what is most popular, what your online broker recommends, or what your charting software promotes but what is best for your Trading Style and strategies. If you use a very popular indicator, be aware that HFTs are now employing algorithms that quickly identify large groups of Retail Traders all trading with these indicators. Learning the new hybrid Stock Leading Indicators that are leading price and are written for the automated market with the new Market Structure, will lower risk and increase potential profits.  

The Market Structure has changed more in the past decade than in the prior 100 years. Using outdated indicators leaves Retail Traders struggling with chronic weak stock picks, disappointing results, and whipsaws. Improving your trading by taking some time to update your trading indicators to the modern indicators that lead price will be worth the effort.

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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDS with every course.

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