MACD,
stochastic are technical
indicators
amongst others.
Day
and swing traders utilize them in the financial markets. However,
only few
master
those technical
indicators.
This article will help market participants to sharpen
their
technical
indicators.
Sharpening
Technical
Indicators Step
One
The
first step to sharpening
technical
indicators
is to use them accordingly with the market patterns.
1/
Rising Channel
Market
Pattern
2/
Declining Market
Pattern
3/
Horizontal Market
Pattern
Contrary
to the market patterns, technical
indicators
belong to two main categories:
a/
trending technical
indicators
and
2/
balanced market technical
indicators.
Indeed,
trending technical
indicators
are adequate during trending phases (both the rising and
declining
channels). Conversely, balanced market technical
indicators
are appropriate during the horizontal market pattern.
To
quickly sharpen technical
indicators,
one ought to apply them accordingly by aligning them with the
appropriate market pattern. For example MACD indicator, Moving
averages and the True Strength Index are more effective during
the
trending phase. On the other hand, the RSI, CCI and the stochastic
indicators
are
more suitable during the consolidation (balanced market).
Note
that the only time, one will use a momentum technical oscillator
during the trending phase is to time the entry in
the
direction of the trend when the medium term trend is aligning with
the long term trend.
Sharpening
Technical
Indicators Step
Two
The
next step to sharpen technical
indicators
is
to understand their ultimate purposes.
Indeed,
each technical indicator has a unique purpose.
For
example the purpose of the stochastic indicator is to
pinpoint
divergence trading set-ups.
Therefore,
it is more efficient to use the stochastic when one is screening for
divergence trading set-ups
stocks.
The
RSI oscillator's
first priority is to
compare
the magnitude of recent gains to losses. Therefore, it is useful to
pinpoint
stocks
that are in the bullish zone and those that are in the bearish
zones.
A
stock screening conditions would be RSI crossing above or below the
fifty level.
The
purpose of the CCI indicator is to highlight the overbought and
oversold
financial
instruments relatively to a specific moving average. For example, if
one is using the CCI indicator
period
twenty on the monthly chart,
and
the CCI is above plus hundred level, it signifies that the asset is
overbought in comparison to moving average twenty. Contrary, the
asset is oversold in comparison to the monthly chart
moving
average twenty when the CCI oscillator falls below the negative
hundred.
Note
that an asset can be oversold or overbought for a long time
therefore, one should not sell as soon as one identifies an
overbought asset and vice versa.
Similarly,
MACD 's primary role is to pinpoint trending stocks by using moving
averages convergence and divergence.
Indeed,
the deviation of the moving twelve above the moving twenty six
indicates the possibility of a bullish trend when one is using the
standard MACD (12, 26, 9). Conversely, the MA 12 deviation below the
moving average twenty six indicates a possible bearish trend. Note
that when the moving average twelve deviates from the moving average
twenty six, it is known as moving averages
divergence. Moving averages divergence also indicates a strong
momentum and volatility. On the other hand the moving
averages convergence
refers to a low volatility and balanced market.
Sharpening
trading tools step three
The
third step to mastering technical
indicators
such as the momentum oscillators is knowing how to trade oversold and
overbought trading set-up.
A
momentum indicator becomes overbought when the price reaches a
resistance level. Now, an astute technical
trader
will
draw that resistance. Consequently, one
will
be ready to sell only and only if the price is suppressed below that
level. However, if the price gains support above the resistance
(breakout) one
will look for an opportunity to buy though the oscillator is
overbought.
Furthermore,
a momentum oscillator is oversold when the price is at
a
support level. This time one must draw the support level, and be
ready to buy only if the price exhibits a bullish trading
signal
above that
support. Nevertheless, one will not hesitate to sell below that
support level if the support turns into a resistance.
Warning
1/Overbought
does not always equal
to
a sell signal and vice versa.
2/
One must implement a top-down trading method when one identifies
those
set-ups.
Sharpening
Technical
Indicators Step
Four
The
step four in sharpening trading tools is to know when and how to use
a
balanced
market technical
indicators
in a trending market. To avoid common trading mistakes such as
selling each time a momentum oscillator is overbought, and buying any
time it is oversold, one can use a
balanced
market technical
indicators
to time their trades during a trending market.
For
example a bullish trader will ignore all overbought trade set-ups
during a trending phase, but will only focus on the oversold trade
set-ups
on the edge.
Obviously,
one will prioritize the overbought trade set-ups
in a bearish trending market and disregard the oversold trading
signals.
Sharpening
Trading
Tools
Step
Five
It
is about coming out the loop of resetting
technical indicators after
a losing trade.
Surprisingly, most traders spent numerous hours changing their
indicator settings. After a losing trade, beginners traders often
change their technical indicators' settings. The belief is that the
better the settings the better is the signal.
In
most cases, those technical
traders
are wasting their time. Technical
traders
often exit that vicious circle as soon they discover that all
technical indicators only
give
warnings. At
the end of the day, the
price action gives the direct
(true) signals.
Therefore, the
price-action
must always
confirm
technical
indicators and their all
warnings.
Conclusion
Surely, one will become a better technical trader as soon as one masters how to sharpen technical indicators.
It is a shame that most technical traders still used a vast array of powerful technical indicators without knowing
how to sharpen them. I believe that one should first learn how to sharpen a technical indicator before using it.
Unfortunately, there are many technical traders out there who have skip that essential step. It is too late though. Today, one can start afresh, and begin to sharpen the most popular technical indicators like a professional. In fact, one should not blame the technical indicators, but oneself if one is still misusing them on a daily basis. Start sharpening your favourite technical indicators today.
