Archive for Indicators
Dear Liberated Stock Traders,
Wall Street is very busy telling us that the “U.S Markets have been up 4 days in a row”. Is that supposed to get us excited? Before you leap on board with you hard earned money, we can have a look at the chart using Fibonacci Retracement to help us assess where some natural support and resistance levels are in the market.
For this analysis we will use Fibonacci Retracement.
Fibonacci numbers are revered in mathematics as the numbers that describe the natural world. The Sequence is simply the sum of any two numbers equals the next in the sequence
The theory behind Fibonacci is that this mathematical pattern can be used to predict the waves of a trend. The most important numbers seem to be in percentage terms 38, 50, 62.
Therefore, if a trend moves from $1 to 100$, it may retrace (go back down) to 1 of 3 important levels. $62, $50, $38.
Fibonacci Retracement On A Long Term Chart
This is a weekly chart of the S&P500, it stretches back 5 years to 2007. This enables us to get some perspective of the Financial Crisis in 2007, and compare that to what is happening today.
You can use Fibonacci Retracement on any chart by following these instruction.
- Select the Fibonacci Retracement Tool in your charting package
- Select the Lowest Point on the chart in this case Point 1
- Drag your mouse to the highest point on the chart in the future, in this case Point 2
You should then see the important Retracement levels drawn (the Grey Dotted Lines)
Important Points to Note
In the 4.5 years since October 2007, the market has failed reach the the all time high of 1,550.
In 2008 when the market broke down through 1,100 points, the market collapsed.
- The retracement line at 38.2%, is equal to 1,125 points in the index. This is currently a support line.
- Any drop through this area could see a further drop to 1,000 points, the 50% retracement line
- The next drop zone could be 950 points, the 61.8% retracement line. This maps back to 2009 /2009 perfectly.
We can see that the 21.6% retracement line at circa 1,225 is providing resistance. A strong move up through this area would be positive.
The Battle Lines
There is a battle occurring in the stock market at the moment. The market participants do not know which way the market will go. The battle lines are drawn at 1,225 and 1,125. We can see there is a battle due to the volatility. In the daily chart we can the length of the candles in June 2011 was very small (low volatility). Since the end of July when the index dropped through its 200 day moving average the size of the bars are much longer (high volatility)
The volatility might be good for day traders who want to take risks. But, for you and I it is better to wait until the market breaks out through the battle lines. Then we should know which way the market will go.
This is an excerpt from the soon to be released Liberated Stock Trader book and the accompanying “Academy Pro Training Course”
The rate of change is very similar to the Momentum indicator mentioned in the previous section, with one important difference, instead of a subtracting the latest price from the price X periods before it divides it. This is an important difference that improves the indicator.
Rate of Change = 100 (C / CX)
The results of ROC are similar but slightly better than that of Momentum as it handles large price swings better. As in the previous section, follow the numbered steps in the following Chart to understand how ROC can tell the story of future price movement.
Now this is a busy chart.
- Using a trend line we can see that ROC breaks its downtrend at the end of November 2008. This is a useful way of using Oscillators, plotting trend lines on them. As oscillators are leading indicators using a trend line will show us when a trend change happens before it is reflected in price.
- The price then follows by moving up from 18.90 to 24.30 a 23% gain.
- Here we see a false signal, this shows us that no indicator is perfect. Always remember the price move is the most important, Oscillators can help us to improve our chances of guessing correctly. However this time it fails.
- ROC indicates a positive divergence, yet price hits resistance at 24.30 and then plummets south.
- ROC now corrects itself and 2 days before the actual severe price drop ROC shoots downwards, this is a warning sign top exit.
- Here again ROC shows a negative divergence.
- Price again hits resistance in June at 21.50. ROC’s divergence was correct and the stock drops.
- ROC Surges upwards in August and although price retraces in September ROC powers on showing a positive divergence.
- The first 2 weeks in October the price surges again.
- ROC shows another negative divergence with the price trend.
- No new price high
- Price falls, again predicted by ROC.
You are now familiar with positive and negative divergences, but also realize that price is the most important indicator and that Oscillators can be wrong. Wait for the indicator to scream, if it says nothing move on.
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Dow Theory has basically 5 tenets.
1. The market discounts everything.
2. The market has 3 trends (Primary, from months to years) Secondary (weeks to months) Minor (days to weeks) Charles Dow holds that minor trends can be random but the other 2 are parts of a cyclical trend.
3. The Primary trend has 3 phases, Accumulation, (the far sighted investors who have see a potential recovery) Public Participation (company earnings are proving good and the general public starts to participate), Distribution (far sighted investor start to sell as they see Stock Price growth is unsustainable in comparison to company earnings or economic climate).
4. The averages must confirm. Using the Dow Jones Industrial Average and the Dow Jones Transports, both must be in sych to have a solid trend. When both head down this is the start of a bear market for example.
5. Market Action. Volume is important and a market moving up on increasing volume is healthy. A market moving down on increasing volume is a warning sign.
Are you wondering where the market is heading? At this point in time it is worth deciding where you stand. Are you Bullish, Bearish or undecided?
A really excellent tool for helping visualize a what stage the market is in, is the Ichimoku Cloud.
Details of the Ichimoku Cloud Theory can be found on the web. The Society of Technical Analysts have good information on reading and understanding the Ichimoku Charts here.
It would seem that the S&P500 breaking through the 1000 barrier only lasted 7 days. During this period we have seen significant indecision and a move of some key important indicators to the downside.
In the chart below you can see.
- RSI in a negative divergence since the start of August.
- Rate of Change (ROC) negative divergence since the start of August.
- MACD in negative territory (below the Zero Line) and looking to stay there
- Price moved strongly below the 10 & 20 Day Moving Averages
- Also the move below 1000 on heavy volume (remember the lesson on volume)
What does a Head and Shoulder Pattern look like. The importance of the Head and Shoulders pattern should not be under-estimated. One of the most reliable patterns in technical analysis yet one of the most misunderstood.
Here we discuss the famous Head and Shoulders price pattern. Understood to be one of the most predictive & reliable of patterns the Head and Shoulders pattern has some unique characteristics. However you do need to know what you are looking for.
A Head & Shoulders Pattern has the following traits.
- two shoulders.
- a high point, the head, in between the shoulders.
- the volume should confirm the pattern. Read More→
Dear investor, use these rules to using Charting Indicators and you will be using a wealth of experience that comes only with years of trading!
“There is no liberation without labor…and there is no freedom which is free.”
There are a lot of stock chart indicators out there; we cannot cover them all in the detail, however the principles of using indicators are as follows
1 – Understand
Understand how the stock chart indicators you are usings are calculated and what they are designed to achieve.
2 – Use Divergence
When an oscillating indicator moves in the opposite direction to price, this is a vital sign. See all previous articles to review how divergences are used correctly.
3 – Back test the indicators
Did your selected indicators work on this stock in the past. Scroll backwards to 1 year before. Then scroll forward day by day or week by week to see the indicator change, and then ask yourself.
- What is this indicator telling me?
- Would I buy/sell this stock based on the information shown?
- If the indicators worked on this stock in the past, it may have a better chance of working in the future.
4 – Use a Family of Indicators
Never use 1 indicator alone, use multiple indicators, they should mostly confirm each other. Use them as a suite of self checks before making a decision.
5 – Use indicators on multiple time frames
Indicators can tell you different things when viewed through different time frames either 1 day, 5 day, monthly, yearly. Using different time frames you can review how far back a trend goes, and see if your hypothesis stands the test of time. Beware that reviewing trends further back than 2 years may render the data irrelevant. Sometimes markets have a very short memory and stocks can completely change character.
Some indicators are proprietary and come only with “Pay For” applications. The person who has a larger portfolio way do well to invest in a solution that provides professional quality charting information. Telechart from the Worden Brothers is one such tool, that I believe delivers a superior Trading and investment framework. The Worden Family has 2 particular indicators worthy of special mention, Time Segmented Volume (TSV) & Money Stream (MS). These indicators really deliver the goods, and are alone worth the $29 per month subscription, never mind the rest of the application which is one of the finest solutions available to the private investor.
6 – Use custom timescales
You need to tune the timescales or parameters on the indicators so that they reflect the timescale that you want to invest.
- If you are buying a stock for the long term (2-10 years), use longer term time frames and base your decisions primarily on fundamentals, then on chart patterns.
- If you are buying Mid-Term (6 months – 2 years), use Earnings Momentum in the last 6 quarters, plus the chart indicators, Moving Averages 50, 100, 200 days)
- If you are buying short term (1 weeks to 6 months) use indicators that are tuned for the short term, Moving averages 10 & 20 Days, Money Flow, MACD (10:30:5), Stochastics.
- If you are a day trader you are usually full-time, stressed out, and trading Real Time / Intraday, which requires specialist software, and a penchant for losing money. The Liberated Stock Trader is not for you.
7 – Price is the most important indicator
Price is the most important indicator of all, it does not matter what the other indicators say, if your stock is moving against you take action, do not blame the indicators.
8 – Be aware of the market influence
Be aware of the markets influence over your stock, if it is a disaster day on the markets, it does not matter what the indicators tell you will happen, your stock can get dragged down with the masses.
9 – Pre-Define a set of rules
Pre define a set of rules for the trade and test the rules. For example:
- MA 10 & 20 Cross Over
- MACD shows a positive Divergence over 8 weeks
- RSI shows a positive divergence
10 – Understand the meaning of supply and demand
Supply and demand can be gauged by using the Volume indicator in conjunction with price. You need to understand that fluctuations in volume and price have a relationship and have a meaning.
Good luck, and may the Trend be with you.
Any questions, leave a post!
For a premium training course that covers to a professional level how to use charts and indicators effectively – see our Liberated Stock Trader PRO Training.
The power of Moving Averages as a stock market technical analysis indicator should never be under-estimated. See how Moving averages can be used in a practical way
The Power of Moving Averages In Stock Market Analysis
Indicators may seem like something only Einstein himself can master, but here everything is within reach, in just a few minutes you will have a solid understanding of a very important concept. Indicators are lines that get plotted on a Stock chart to make it simpler for you to understand the history, and perhaps the future of a stock.
Moving Averages are your friends.
Moving averages are the staple diet of any chart reader, and enable you to visualize changes in trend in price.
Moving Averages or “MA” are a simple mathematical calculation that takes the average price (mean) for a given period and plots this on a chart. Read More→
Volume is the fuel in a stocks movement – Technical Analysis
“Be a lamp unto yourself. Work out your liberation with diligence.” Buddha.
Dear “Liberated Stock Trader”, we hope your path runs true. In this section we discuss the value of Volume, and how it can assist in good Trading decisions.
Volume in charts is usually expressed as the number of Shares traded that day. It is most useful to view volume indicators in comparison to what is the normal number of Shares traded for a stock on average. For example if volume starts to increase dramatically for a stock we can assume there has been some news, earnings release or otherwise external factors acting on the stock. Read More→
Moving Average Convergence Divergence – Is it Important?
On the topic of MACD, I decided to reduce the amount of noise on the topic to the essential need to know information. I encourage you if you have a day to spare to do further reading on the topic, however it can be a little hard going and is good if you suffer insomnia.
MACD is an important indicator.
MACD was developed by Gerald Appel as a means of easily showing the Moving Averages of a stock in a way that could show the strength of the difference of the Moving Averages.
For example if the 10 & 20 day moving averages for a stock move away from each other as the stock is going up, this means the stock is gaining strength.
MACD is based on 3 configurable parameters Read More→