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What is the Most Important Indicator of All?
By David Chandler
Most traders have a favorite technical indicator.
The one that they have the most confidence in. The
one that, from experience, they trust the most. Or the
one that they always look at first.
For some it is the RSI. Others like the Stochastic or the
MACD . Or one of the literally hundreds of other
indicators that are available.
Well, I love the MACD. And the Stochastic is also a
favorite.
But there is one indicator that I refer to more often
than any other. However, before I tell you what it is, it
is important that this discussion is placed in context.
I always stress with the traders that I mentor that the
most important part of your analysis is price action.
By this I mean that the very first thing you should look
at is the shape of the stock's chart. And any patterns
that you may be able to identify.
In particular, look for trends and consolidation.
Candlestick reversal patterns and support and
resistance levels. And be particularly aware of all time
or 52-week highs or lows.
Also, be on the lookout for double tops and bottoms
and triangles and head and shoulder patterns.
Because it is only in the context of the basic price
action that you can make your trading decisions. And
it is only from this understanding that you should begin
to apply your technical indicators.
So, establish the context for your further analysis.
Indeed, use this first process as a screening device.
Because, unless the chart immediately ¡°speaks¡± to
you, you should eliminate the stock from any further
review.
What I mean by this is that unless there is a clear
reversal pattern or potential for a breakout, move on.
Don't waste time analyzing charts that have no
likelihood of immediate movement.
And one of the best patterns for short-term trading is
the channel. Always keep an eye out for these and
when you find one, give serious consideration to
trading them.
Now, let's get back to our earlier discussion. What is
the most important indicator?
Well, whilst this might surprise some of you, I believe it is
volume.
You see volume is an indication of the strength of price
action. A market needs high volume or increasing
volume to sustain a movement in price.
So we want to see volume moving in the direction of
the price. Increasing both in an uptrend and also a
downtrend.
But realize that it takes more effort to push prices
higher than it does to cause them to drop. So
increasing volume is more significant in an uptrend
than a downtrend.
If volume is diverging from the trend [going down
instead of up] then we would normally not carry out
any further analysis. Because the lack of volume
means that there is a lower probability of price
movement in the direction of the current trend.
Note however, that divergence can be an indication
that a trend is about to end. So this can be an early
sign of a reversal.
Another important aspect to volume that is often
overlooked is in regard to retracements. Because the
volume during retracements gives us a significant
indication of the strength of the overall trend.
A strong uptrend should have higher volume on the
upward legs of the trend and lower volume on the
downward or corrective legs. Similarly in a downtrend.
Volume is best plotted below your chart as a
histogram, or series of vertical lines.
And it helps to add a moving average line over the
histogram to smooth the volume readings. I use a 3
day MA but you can experiment to see what works
best for you.
But most importantly, always consider volume before
entering a trade.
The above comments are offered for educational purposes
only. We are not providing you with financial advice. We are
simply sharing with you what has and hasn't worked for us
personally. If you wish to trade or invest in the stock market
you should obtain advice from a registered licensed advisor.
About the Author
David Chandler
http://www.stockmarketgenie.com
For your FREE Stock Market Trading Mini Course:
"What The Wall Street Hot Shots Won't Tell You!" go to: http://www.stockmarketgenie.com
Article Source: http://www.simplysearch4it.com/article/6503.html
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