back start next


[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [ 12 ] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] [73] [74] [75] [76] [77] [78] [79] [80] [81] [82] [83] [84] [85] [86] [87] [88] [89] [90] [91] [92] [93] [94] [95] [96] [97] [98] [99] [100] [101] [102] [103] [104] [105] [106] [107] [108] [109] [110] [111] [112] [113] [114] [115] [116] [117] [118] [119] [120] [121] [122] [123] [124] [125] [126] [127] [128] [129] [130] [131] [132] [133] [134] [135] [136] [137] [138] [139] [140] [141] [142] [143] [144] [145] [146] [147] [148] [149] [150]


12

Figure 2.9 Stochastics. an example of a stochastics line.

Stochastics

May IJTri Od lAui Sep l5d lNo7

Figure 2.10 indicator confirmations. a composite of various indicators on the same price time series.



should be seen as solving only one piece of the puzzle. Their true value can be realized only when used in concert with other (dissimilar) indicators to provide an overall composite picture of an issues underlying trend strength and direction.

The more evidence there is to support the indicators confirmation of one another, the more valid the conclusion-and the higher the probability of profit. For example, Figure 2.10 shows how powerful the ensuing price move was when the buy (B) and sell (S) signals of each indicator (volatility, accumulation/distribution, cyclicality, internal strength, trend deviation and position in range) confirmed each other.

A Word of Caution

When momentum oscillators move rapidly from oversold to overbought levels and vice versa, or when the oscillator curve reaches an extreme high/low reading, it may seem that it is exceptionally strong evidence of an impending change in price direction. In actuality, moves of extraordinary proportions in momentum oscillators, either in duration or magnitude, are usually an indication of exceptional price strength and strong evidence in favor of a continuation in trend direction. In these instances, it is wise to ignore the signals generated by these oscillators and rely instead on trend-based indicators.

Some indicators, like momentum oscillators, are only effective in trading markets, and can be counter productive (and quite expensive) in trending markets. Other indicators, like those based on moving averages, are primarily effective in trending markets and can be counterproductive in trading markets. The secret to success with technical analysis, then, lies in the art of knowing the kind of market you are in and, therefore, upon which indicators to rely.



Chapter 3

Combining Trend Analysis with Indicator Readings

David Vomund

Which technical indicator is the most effective? This frequently asked question is difficult to answer because most indicators work well only in a particular market environment. Most indicators can be classified into two categories defined by the market environment (trending or trading) in which the indicators are effective.

In strong trending markets, some indicators work very well while others fail to give good results. In consolidating or trading markets, those indicators that failed during trending market environments often work best. Before analyzing a security with a set of indicators, it is essential to determine the trend of the security and then apply the appropriate indicators in the analysis.

Determining the Trend

There are several methods to help determine whether a security is in a trending or nontrending (trading) environment. The ADX indicator, developed by Welles Wilder, is designed to flag trending securities. Those securities with an increasing ADX indicator, especially when the indicator is above 30, are in a trending environment while those with a decreasing ADX are in a trading environment. This indicator is generally only helpful to short-term traders.

My preferred method of determining whether a security is in a trending or a trading environment is to simply look at a chart of the security along with its 28-day moving average. When price rarely crosses the moving average, the security is in a trending environment. However, if price constantly crosses the moving average, the security is in a trading environment.

Nike (NKE) is an example of a strong trending stock. The top half of Figure 3.1 shows Nike along with its 28-day moving average. Notice that Nike never fell below its 28-day moving average from March until June. The moving average acted as support as the stock moved higher.



[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [ 12 ] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] [73] [74] [75] [76] [77] [78] [79] [80] [81] [82] [83] [84] [85] [86] [87] [88] [89] [90] [91] [92] [93] [94] [95] [96] [97] [98] [99] [100] [101] [102] [103] [104] [105] [106] [107] [108] [109] [110] [111] [112] [113] [114] [115] [116] [117] [118] [119] [120] [121] [122] [123] [124] [125] [126] [127] [128] [129] [130] [131] [132] [133] [134] [135] [136] [137] [138] [139] [140] [141] [142] [143] [144] [145] [146] [147] [148] [149] [150]