Choosing Leading Stock 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.
Go to the
TechniTrader Stock Leading Indicators Webinar, to experience for yourself the
excellence of TechniTrader education.
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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.
Go to the TechniTrader
MACD Webinar, to experience for yourself the excellence of TechniTrader
education.
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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 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.
The chart example
below shows quiet accumulation in the bottom chart window, of a stock prior to
its Earnings Release.
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 High Frequency Traders 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.
Go to the Learning
Center and watch a wide variety of training webinars including Bollinger Bands,
How to Improve MACD, Candlestick Patterns, Technical Analysis and much more.
TechniTrader
The Gold Standard in Stock Market Education
The Gold Standard in Stock Market Education
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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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.