|
 |
Introduction to stock indicatorsThere are various technical stock indicators that you can use but the simplest technical indicators are moving averages, stochastic and MACD. I actually use these three indicators together using a special combo of setting that help me a great deal. I discuss my very efficient strategy in details in MY trading plan. Generally speaking, the more stock indicators that confirm your setup, the better. Technical indicators go along with everything described in this book; they should be seen as additional tools. However, some trades might only use certain indicators and make trades based on them. I will not describe all the technical indicators in detail since it would be too much to fit in here and most likely just be confusing. I am presently working on a compilation of all the available indicators and will likely offer them free of charges in the near future so stand by… So let's look at the big three I like to use: MACD ( Moving Average Convergence Divergence) It’s probably the most consistent stock indicator of significant trend changes in a stock. It shows us when pressure is getting stronger either upward or downward. Since most of the money in the market is institutional, it basically shows us what the big guys are doing… The trick is with the values you give the MACD. The standard is usually 12-26-9 but this setting, I find, is too slow. In MY trading plan I discuss the particular value I use to predict good entry and exit points when combined with the other indicators I use. The way to use it is quite simple: The MACD gives you a buy or sell signal when it crosses the “0” level… The second stock indicator I use is the Stochastic: This is a momentum tool that tracks overbuying and overselling of a stock. Overselling occurs when a big institutional guy starts selling and others join in. That creates a lot of downward price pressure, which can generate a lot of short term institutional concern. When that happens, other institutional guys wait until they think the stock is as low as it’s going to go and start buying. What they do, the stochastic tool sees and tells us to buy! The stochastic is constituted of two lines: one is the buy line and the other one is the sell line. When the two crosses we have a signal. Again, I discuss the particular setting I use for this tool too in MY trading plan. And finally, the moving average: Moving averages are probably the most widely stock indicators followed and therefore most significant stock indicator. And yet, they are very simple to use. Here's a general description of moving averages: The changing prices of a security from tick to tick, day to day or whatever time period you are looking at may seem random, but there are ways to smooth out this randomness. One way trader’s look to make sense from this seemingly unpredictable sea moving averages. If you are going to trade professionally it is vital that you can identify trading opportunities. To this end the concept of moving averages is a very useful tool to understand. A moving average (MA) is a way to try and eliminate or minimize the fluctuations of the numerical value of price fluctuations we are observing. This will help us identify the underlying value. Moving averages are generally calculated using the closing price. What, in effect, the moving average does, is to eliminate the fluctuations for periods below the number, which is chosen, for the average. I.e. a 4-day or 9-week moving average eliminates the presence of price fluctuations for periods up to 4 days or 9 weeks respectively. A 200-day moving average eliminates the presence of daily price fluctuations for period below 200 days. This smoothing effect of price change increases as you use longer and longer periods as the average. In an attempt to give more importance to more recent prices, different types moving averages have been developed. These include smoothed, weighting and exponential moving averages. •Simple moving average (SMA): Gives equal weighting to each time period’s price. •Weighted moving averages (WMA): uses a system that gives more weight to recent prices •Exponential moving averages (EMA): gives more weight to the recent prices The moving averages that are most widely used are simple moving averages. All of the MA’s I refer to are simple moving averages. I won’t go into their complex mathematical derivations of these. Why not? Because detailed retrospective studies of their use has shown that the simple moving average statistically outperforms or equals the use of these newer, biased moving averages. So, moving averages have multiple functions: They serve as important areas of support and resistance and give trade signals if a stocks’ price is crossing above or below them. If a stock trades above the moving average line it serves as support to the downside, if it trades below it will serve as resistance to the upside. I could discus MA for ever but like I said earlier, my goal is to give you the essentials so that you can start developing your trading plan… and then trade, or get MY trading plan and start trading… your choice. So, in a few words: this stock indicator tracks an average of price during a specific period. The moving average smoothes out the peaks and valleys of daily price fluctuations and gives us an easy view of the price trend. Again here you need to adjust the settings so that it synchs well with the other two indicators. You need to know that the values I use work well when using these three indicators together but you can use which ever indicators out there and come up with your own combinations, it just takes a little time and some extra cash for the trial and error period... If you want to skip this step go ahead and find out what these values are in MY trading plan. Like I said earlier, there are many other technical stock indicators out there. I will give you a quick description of some of them right here: -Accumulation/Distribution Line - A technical indicator that attempts to quantify the flow of money into and out of a given stock. -Average Directional Index (ADX) - A technical stock indicator system that attempts to quantify how strongly a stock is trending. -Average True Range (ATR) - A technical indicator that attempts to show a stock's volatility. -Bollinger Bands - A chart overlay that shows a stock's volatility and direction. -Commodity Channel Index (CCI) - A technical indicator that attempts to display cyclical turns in a stock or commodity. -Chaikin Money Flow (CMF) - A technical indicator that combines price and volume in an attempt to show money flow into and out of a given stock. -Money Flow Index (MFI) - A technical indicator that attempts to show the strength of a given stock's trend. -On Balance Volume (OBV) - One of the first technical stock indicators that attempted to measure money flow into and out of stocks. -Parabolic SAR - A technical chart overlay that attempts to show where price stops should be set. -Relative Strength Index (RSI) - A popular technical indicator that tries to quantify a stock's current direction and strength. -Standard Deviation (Volatility) - A statistical indicator that describes a stocks volatility. -TRIX - A technical indicator that uses a triple-smoothed moving average to filter price movements. -Williams %R - A popular technical indicator that uses Stochastics to determine overbought and oversold levels. I sometimes consult some of them when in doubt. I look for more indicators that confirm my premise. On that note, you should know that if you look long enough you will always find indicators that confirm your beliefs so be careful and remain as objective as possible by paying special attention to the indicators that do not support your vision. Remember this golden rule: If you need to look to long to confirm your set up it means you should move on to the next stock on your list. There are enough good set ups out there! Now let's move on to the next chapter : "Chart setups" 
|
|
